Optimal Macroprudential Policy
AbstractWe introduce financial market friction through search and matching in the loan market into a standard New Keynesian model. We reveal that the second order approximation of social welfare includes the terms related to credit, such as credit market tightness, the volume of credit, and the loan separation rate, in addition to the inflation rate and consumption under financial market friction. Our analytical result justifies why optimal policy should take credit variation into account. We introduce monetary policy and macroprudential policy measures for financial stability into the model. The optimal outcome is achieved through monetary and macroprudential policies by taking into account not only price stability but also financial stability.
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Bibliographic InfoPaper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2013-51.
Length: 6 pages
Date of creation: Aug 2013
Date of revision:
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Optimal macroprudential policy; optimal monetary policy; financial market friction;
Find related papers by JEL classification:
- 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
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-23 (All new papers)
- NEP-BAN-2013-08-23 (Banking)
- NEP-CBA-2013-08-23 (Central Banking)
- NEP-DGE-2013-08-23 (Dynamic General Equilibrium)
- NEP-MAC-2013-08-23 (Macroeconomics)
- NEP-MON-2013-08-23 (Monetary Economics)
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