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How Complementary Are Prudential Regulation and Monetary Policy?

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  • Canuto, Otaviano

    ()
    (World Bank)

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    Abstract

    Could either monetary policy or financial prudential regulation be relied on individually to mitigate asset price cycles or their effects? If both ways are effective, monetary policy and prudential regulation could then be considered “substitutes,” in the sense that the individual use of either instrument leads to a reduction in the volatility of both corresponding targets. This note, however, argues in favor of complementarity—rather than substitution—in the use of monetary and macroprudential policies: the combined (articulate) use of both policies tends to be more effective than a standalone implementation of either.

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    File URL: http://siteresources.worldbank.org/INTPREMNET/Resources/EP60.pdf
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    Bibliographic Info

    Article provided by The World Bank in its journal Economic Premise.

    Volume (Year): (2011)
    Issue (Month): 60 (June)
    Pages: 1-7

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    Handle: RePEc:wbk:prmecp:ep60

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    Related research

    Keywords: monetary policy; financial regualtion; prudential regulation; asset price; cycles; financial crisis; volatility; complementarity; macroeconomics; Banks;

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Mathias Drehmann & Claudio Borio & Leonardo Gambacorta & Gabriel Jiminez & Carlos Trucharte, 2010. "Countercyclical capital buffers: exploring options," BIS Working Papers 317, Bank for International Settlements.
    2. Pierre-Richard Agénor & Koray Alper & Luiz Pereira da Silva, 2009. "Capital Requirements and Business Cycles with Credit Market Imperfections," Centre for Growth and Business Cycle Research Discussion Paper Series 124, Economics, The Univeristy of Manchester.
    3. MArcio Gomes Pinto Garcia, 2011. "Can Sterilized FX Purchases under Inflation Targeting be Expansionary?," Textos para discussão 589, Department of Economics PUC-Rio (Brazil).
    4. de la Torre, Augusto & Ize, Alain, 2009. "Regulatory reform : integrating paradigms," Policy Research Working Paper Series 4842, The World Bank.
    5. Jonathan David Ostry & Atish R. Ghosh & Karl Friedrich Habermeier & Marcos Chamon & Mahvash Saeed Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows," IMF Staff Position Notes 2010/04, International Monetary Fund.
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    Cited by:
    1. Canuto, Otaviano & Ghosh, Swati, 2013. "Dealing with the Challenges of Macro Financial Linkages in Emerging Markets," World Bank - Economic Premise, The World Bank, issue 129, pages 1-8, November.

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