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Macroprudential policy: its effects and relationship to monetary policy

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  • Hyunduk Suh
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    Abstract

    This paper examines the interactions of macroprudential policy and monetary policy in a New Keynesian DSGE model with financial frictions. Macroprudential policy can stabilize credit cycles. However, a macroprudential instrument that aims to stabilize a specific segment of the credit market can cause regulatory arbitrage, that is, a reallocation of credit to a less regulated part of the market. Within this model, welfare-maximizing monetary policy aims to stabilize only inflation and macroprudential policy only stabilizes credit. Two aspects of the model account for this dichotomy. First, credit stabilization is welfare improving because lower volatility is compensated by higher mean equilibrium credit and capital. Second, monetary policy is sub-optimal for credit stabilization. The reason is that it operates on the decisions of borrowers and savers, while macroprudential policy operates only on the decisions of borrowers.

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    File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2012/wp12-28.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 12-28.

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    Date of creation: 2012
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    Handle: RePEc:fip:fedpwp:12-28

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    Related research

    Keywords: Ratio analysis;

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    1. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2007. "Shocks, Structures or Monetary Policies? The Euro Area and US After 2001," NBER Working Papers 13521, National Bureau of Economic Research, Inc.
    2. Stefan Gerlach & Wensheng Peng, 2003. "Bank Lending and Property Prices in Hong Kong," Working Papers 122003, Hong Kong Institute for Monetary Research.
    3. Zhang, Longmei, 2009. "Bank capital regulation, the lending channel and business cycles," Discussion Paper Series 1: Economic Studies 2009,33, Deutsche Bundesbank, Research Centre.
    4. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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