Macroprudential Rules and Monetary Policy when Financial Frictions Matter
AbstractThis paper examines the interaction between monetary policy and macroprudential policy and whether policy makers should respond to financial imbalances. To address this issue, we build a dynamic general equilibrium model that features financial market frictions and financial shocks as well as standard macroeconomic shocks. We estimate the model using Canadian data. Based on these estimates, we show that it is beneficial to react to financial imbalances. The size of these benefits depends on the nature of the shock where the benefits are larger in the presence of financial shocks that have broader effects on the macroeconomy.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 12-6.
Length: 37 pages
Date of creation: 2012
Date of revision:
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Economic models; Financial markets; Financial stability; Monetary policy framework;
Find related papers by JEL classification:
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-08 (All new papers)
- NEP-CBA-2012-03-08 (Central Banking)
- NEP-DGE-2012-03-08 (Dynamic General Equilibrium)
- NEP-MAC-2012-03-08 (Macroeconomics)
- NEP-MON-2012-03-08 (Monetary Economics)
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