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Institutional mandates for macroeconomic and financial stability

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  • Agénor, Pierre-Richard
  • Flamini, Alessandro

Abstract

The performance of alternative institutional mandates in achieving macroeconomic and financial stability is studied in a model with financial frictions and reserve requirements as the main instrument of macroprudential regulation. The analysis shows that under a policy loss evaluation approach, coordination leads to a substantial gain in stability in response to various shocks, with the policy interest rate and the required reserve ratio exhibiting a high degree of complementarity. The latter is also more efficient than the former in promoting financial stability. In addition, it is optimal to delegate the financial stability goal also to the monetary authority when the financial regulator only operates a credit-based reserve requirements rule. These results hold under a utility-based welfare evaluation approach as well, as long as the central bank’s institutional mandate focuses mainly on macroeconomic stability. Thus, when the mandate bestowed to policymakers by society accounts for financial stability, evaluating the performance of policy regimes based solely on a welfare criterion could be inappropriate.

Suggested Citation

  • Agénor, Pierre-Richard & Flamini, Alessandro, 2022. "Institutional mandates for macroeconomic and financial stability," Journal of Financial Stability, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:finsta:v:62:y:2022:i:c:s1572308922000857
    DOI: 10.1016/j.jfs.2022.101063
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    5. Agénor, Pierre-Richard & Jackson, Timothy & Jia, Pengfei, 2021. "Macroprudential policy coordination in a currency union," European Economic Review, Elsevier, vol. 137(C).

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    More about this item

    Keywords

    Macroeconomic stability; Financial stability; Reserve requirement ratio; Macroprudential regulation; Coordination between the monetary authority and the financial regulator;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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

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