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Monetary and macroprudential policy interactions in a model of the euro area

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  • Dennis, Richard
  • Ilbas, Pelin

Abstract

We use the two-country euro area model developed by Quint and Rabanal (2014) to study policymaking in a monetary union. We focus on: 1) a two-policymaker setting where there is strategic interaction between a single monetary authority and an EMU-level macro-prudential authority, and; 2) a three-policymaker setting where there is strategic interaction between a single monetary authority and two regional-level macroprudential authorities. In the former, price stability and financial stability are pursued at the area-wide level, while in the latter each macro-prudential authority adopts region-specific objectives. We compare cooperative and non-cooperative equilibria in simultaneous-move and leadership environments, each obtained assuming discretionary policymaking. In the two-policymaker setting, we find that the gains from either the monetary authority or the macroprudential regulator having a first-mover, or leadership, advantage are somewhat limited, and the most favorable outcome is achieved under cooperation where both policies are formulated and conducted simultaneously. In the three-policymaker setting, we find that delegating macroprudential policy to regional macroprudential regulators plays an important role in achieving regional stability.

Suggested Citation

  • Dennis, Richard & Ilbas, Pelin, 2023. "Monetary and macroprudential policy interactions in a model of the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:dyncon:v:154:y:2023:i:c:s0165188923001124
    DOI: 10.1016/j.jedc.2023.104706
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary policy; Macro-prudential policy; Policy coordination;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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