Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/241179 
Year of Publication: 
2020
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2020-13
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We study a novel policy tool-interest rate uncertainty-that can be used to discourage inefficient capital inflows and to adjust the composition of external account between shortterm securities and foreign direct investment (FDI). We identify the trade-offs faced in navigating between external balance and price stability. The interest rate uncertainty policy discourages short-term inflows mainly through portfolio risk and precautionary saving channels. A markup channel generates net FDI inflows under imperfect exchange rate passthrough. We further investigate new channels under different assumptions about the irreversibility of FDI, the currency of export invoicing, risk aversion of outside agents, and effective lower bound in the rest of the world. Under every scenario, uncertainty policy is inflationary.
Subjects: 
International financial markets
Uncertainty and monetary policy
Monetary policy framework
JEL: 
E32
F21
F32
F38
G15
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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