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Macroprudential and monetary policies: Implications for financial stability and welfare

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  • Rubio, Margarita
  • Carrasco-Gallego, José A.

Abstract

In this paper, we analyze the implications of macroprudential and monetary policies for business cycles, welfare, and financial stability. We consider a dynamic stochastic general equilibrium (DSGE) model with housing and collateral constraints. A macroprudential rule for the loan-to-value ratio (LTV), which responds to credit growth, interacts with a traditional Taylor rule for monetary policy. We compute the optimal parameters of these rules both when monetary and macroprudential policies act in a coordinated and in a non-coordinated way. We find that both policies acting together unambiguously improves the stability of the system. In both cases, this interaction is welfare improving for the society, especially in the case of the non-coordinated game. There is though a trade-off between borrowers and savers. However, borrowers can compensate the saver’s welfare loss àla Kaldor–Hicks to achieve a Pareto-superior outcome.

Suggested Citation

  • Rubio, Margarita & Carrasco-Gallego, José A., 2014. "Macroprudential and monetary policies: Implications for financial stability and welfare," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 326-336.
    • Handle: RePEc:eee:jbfina:v:49:y:2014:i:c:p:326-336
    DOI: 10.1016/j.jbankfin.2014.02.012
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    More about this item

    Keywords

    Macroprudential; Monetary policy; Welfare; Financial stability; Loan-to-value; Kaldor–Hicks efficiency;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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