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Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area

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  • Dominic Quint

    (Free University Berlin)

  • Pau Rabanal

    (International Monetary Fund)

Abstract

In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal, and financial frictions, and hence both monetary and macroprudential policy can play a role. We find that the introduction of a macroprudential rule would help reduce macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policy would always increase the welfare of savers, but its effects on borrowers depend on the shock that hits the economy. In particular, macroprudential policy may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 10 (2014)
Issue (Month): 2 (June)
Pages: 169-236

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Handle: RePEc:ijc:ijcjou:y:2014:q:2:a:8

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Cited by:
  1. Christopher Otrok & Gianluca Benigno & Huigang Chen & Alessandro Rebucci & Eric R. Young, 2012. "Monetary and Macro-Prudential Policies: An Integrated Analysis," Working Papers 1208, Department of Economics, University of Missouri.
  2. Malikane, Christopher & Ojah, Kalu, 2014. "Fisher's Relation and the Term Structure: Implications for IS Curves," MPRA Paper 55553, University Library of Munich, Germany.
  3. Paolo Angelini & Sergio Nicoletti-Altimari & Ignazio Visco, 2012. "Macroprudential, microprudential and monetary policies: conflicts, complementarities and trade-offs," Questioni di Economia e Finanza (Occasional Papers) 140, Bank of Italy, Economic Research and International Relations Area.
  4. Crowe, Christopher & Dell’Ariccia, Giovanni & Igan, Deniz & Rabanal, Pau, 2013. "How to deal with real estate booms: Lessons from country experiences," Journal of Financial Stability, Elsevier, vol. 9(3), pages 300-319.
  5. F. Gulcin Ozkan & D. Filiz Unsal, 2014. "On the use of Monetary and Macroprudential Policies for Small Open Economies," IMF Working Papers 14/112, International Monetary Fund.
  6. Ko Munakata & Koji Nakamura & Yuki Teranishi, 2013. "Optimal Macroprudential Policy," CAMA Working Papers 2013-51, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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