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Non-standard monetary policy, asset prices and macroprudential policy in a monetary union

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  • Burlon, L.
  • Gerali, A.
  • Notarpietro, A.
  • Pisani, M.

Abstract

This paper evaluates the interaction of non-standard monetary measures and macroprudential policy in a monetary union by developing a two-region model of the euro area (EA) and simulating the Eurosystem’s Asset Purchase Programme (APP). In each region some households are subject to a borrowing constraint, and the local real estate is used as collateral. Our results are as follows. First, in one region a large loan-to-value (LTV) ratio can amplify the positive effect of the union-wide APP on domestic households’ borrowing. Second, during the APP implementation, overly optimistic (i.e., non-fundamental) expectations about local real estate prices would further augment households’ borrowing in that region. Third, region-specific macroprudential measures that stabilize private debt can counteract the effects of the optimistic expectations and favor a macroeconomic expansion driven only by fundamentals, i.e., the APP, without the need to scale back the latter. Fourth, both the APP and the region-specific macroprudential policy bring about a welfare improvement.

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  • Burlon, L. & Gerali, A. & Notarpietro, A. & Pisani, M., 2018. "Non-standard monetary policy, asset prices and macroprudential policy in a monetary union," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 25-53.
    • Handle: RePEc:eee:jimfin:v:88:y:2018:i:c:p:25-53
    DOI: 10.1016/j.jimonfin.2018.06.005
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    6. Concetta Rondinelli & Roberta Zizza, 2020. "Spend today or spend tomorrow? The role of inflation expectations in consumer behaviour," Temi di discussione (Economic working papers) 1276, Bank of Italy, Economic Research and International Relations Area.
    7. A. Bartocci & L. Burlon & A. Notarpietro & M. Pisani, 2021. "Macroeconomic Effects of Non‐Standard Monetary Policy Measures in the Euro Area: The Role of Corporate Bond Purchases," Manchester School, University of Manchester, vol. 89(S1), pages 97-130, September.
    8. Neri, Stefano & Gerali, Andrea, 2019. "Natural rates across the Atlantic," Journal of Macroeconomics, Elsevier, vol. 62(C).
    9. Darracq Pariès, Matthieu & Notarpietro, Alessandro & Kilponen, Juha & Papadopoulou, Niki & Zimic, Srečko & Aldama, Pierre & Langenus, Geert & Alvarez, Luis Julian & Lemoine, Matthieu & Angelini, Elena, 2021. "Review of macroeconomic modelling in the Eurosystem: current practices and scope for improvement," Occasional Paper Series 267, European Central Bank.
    10. Stefano Neri & Stefano Siviero, 2019. "The non-standard monetary policy measures of the ECB: motivations, effectiveness and risks," Questioni di Economia e Finanza (Occasional Papers) 486, Bank of Italy, Economic Research and International Relations Area.
    11. Benigno Pierpaolo & Canofari Paolo & Di Bartolomeo Giovanni & Messori Marcello, 2020. "The ECB’s Asset Purchase Programme: Theory, effects, and risks," wp.comunite 00147, Department of Communication, University of Teramo.
    12. Ferrari, Alessandro & Landi, Valerio Nispi, 2020. "Whatever it takes to save the planet? Central banks and unconventional green policy," Working Paper Series 2500, European Central Bank.
    13. Anna Bartocci & Alessandro Notarpietro & Massimiliano Pisani, 2019. "Non-standard monetary policy measures in the new normal," Temi di discussione (Economic working papers) 1251, Bank of Italy, Economic Research and International Relations Area.
    14. Martina Cecioni & Adriana Grasso & Alessandro Notarpietro & Massimiliano Pisani, 2021. "Revisiting monetary policy objectives and strategies: international experience and challenges from the ELB," Questioni di Economia e Finanza (Occasional Papers) 660, Bank of Italy, Economic Research and International Relations Area.
    15. Garcia Revelo, Jose D. & Levieuge, Grégory, 2022. "When could Macroprudential and Monetary Policies be in Conflict?," Journal of Banking & Finance, Elsevier, vol. 139(C).
    16. Lorenzo Burlon & Andrea Gerali & Alessandro Notarpietro & Massimiliano Pisani, 2017. "Macroeconomic effectiveness of non-standard monetary policy and early exit. A model-based evaluation," International Finance, Wiley Blackwell, vol. 20(2), pages 155-173, June.
    17. William Gatt, 2018. "Housing boom-bust cycles and asymmetric macroprudential policy," CBM Working Papers WP/02/2018, Central Bank of Malta.
    18. Agur, Itai, 2019. "Monetary and macroprudential policy coordination among multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 192-209.
    19. policy, Work stream on macroprudential & Policy, Monetary & Stability, Financial & Albertazzi, Ugo & Martin, Alberto & Assouan, Emmanuelle & Tristani, Oreste & Galati, Gabriele & Vlassopoulos, Thomas , 2023. "The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area," Occasional Paper Series 272, European Central Bank.
    20. policy, Work stream on macroprudential & Albertazzi, Ugo & Martin, Alberto & Assouan, Emmanuelle & Tristani, Oreste & Galati, Gabriele & Vlassopoulos, Thomas, 2021. "The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area," Occasional Paper Series 272, European Central Bank.
    21. Iwanicz-Drozdowska Małgorzata & Kurowski Łukasz, 2021. "Keep your friends close and your enemies closer – the case of monetary policy and financial imbalances," German Economic Review, De Gruyter, vol. 22(4), pages 383-414, November.
    22. Nao Sudo & Masaki Tanaka, 2018. "Do Market Segmentation and Preferred Habitat Theories Hold in Japan? : Quantifying Stock and Flow Effects of Bond Purchases," Bank of Japan Working Paper Series 18-E-16, Bank of Japan.

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    More about this item

    Keywords

    Monetary union; Open-economy macroeconomics; Non-standard monetary policy; Zero lower bound; Macroprudential policy;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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

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