We introduce external risks, in the form of shocks to the level and volatility of world interest rates, into a small … open economy model subject to the risk of sudden stops—large recessions together with abrupt reversals in capital inflows …| and characterize optimal macroprudential policy in response to these shocks. In the model, collateral constraints create a …

policy responses for managing such volatility. It also sheds light on some economic costs that stem from volatile capital …