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Dichotomy between macroprudential policy and monetary policy on credit and inflation

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  • Hyunduk Suh

Abstract

This paper examines the different effects of macroprudential policy and monetary policy on credit and inflation using a simple New Keynesian model with credit. In this model, macroprudential policy is effective in stabilizing credit but has a limited effect on inflation. Monetary policy with an interest rate rule stabilizes inflation, but this rule is ?too blunt? an instrument to stabilize credit. The determinacy of the model requires the interest rate?s response to inflation to be greater than one for one and independent of macroprudential policy. That is, the ?Taylor principle? applies to monetary policy. This dichotomy between macroprudential policy and monetary policy arises because each policy is designed to differently affect the saving and borrowing decisions of households.

Suggested Citation

  • Hyunduk Suh, 2012. "Dichotomy between macroprudential policy and monetary policy on credit and inflation," Working Papers 13-06, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:13-06
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    Cited by:

    1. Popoyan, Lilit & Napoletano, Mauro & Roventini, Andrea, 2017. "Taming macroeconomic instability: Monetary and macro-prudential policy interactions in an agent-based model," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 117-140.
    2. Francesco Lamperti & Antoine Mandel & Mauro Napoletano & Alessandro Sapio & Andrea Roventini & Tomas Balint & Igor Khorenzhenko, 2017. "Taming macroeconomic instability," PSE-Ecole d'économie de Paris (Postprint) hal-03399574, HAL.
    3. Ben-Gad, Michael & Pearlman, Joseph & Sabuga, Ivy, 2022. "An analysis of monetary and macroprudential policies in a DSGE model with reserve requirements and mortgage lending," Economic Modelling, Elsevier, vol. 116(C).
    4. T. Bennani & C. Couaillier & A. Devulder & S. Gabrieli & J. Idier & P. Lopez & T. Piquard & V. Scalone, 2017. "An analytical framework to calibrate macroprudential policy," Working papers 648, Banque de France.
    5. Laureys, Lien & Meeks, Roland, 2018. "Monetary and macroprudential policies under rules and discretion," Economics Letters, Elsevier, vol. 170(C), pages 104-108.
    6. repec:hal:spmain:info:hdl:2441/5bnglqth5987gaq6dhju3psjn3 is not listed on IDEAS
    7. Vasco J. Gabriel & Ioannis Lazopoulos & Diana Lima, 2023. "Institutional Arrangements and Inflation Bias: A Dynamic Heterogeneous Panel Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(1), pages 43-76, February.
    8. Tayler, William & Zilberman, Roy, 2014. "Macroprudential Regulation and the Role of Monetary Policy," Dynare Working Papers 37, CEPREMAP.
    9. Tae Soo Kang & Hyunduk Suh, 2017. "Asset-based Reserve Requirements in a Dynamic Stochastic General Equilibrium Model," Asian Economic Papers, MIT Press, vol. 16(2), pages 216-242, Summer.
    10. Krug, Sebastian, 2018. "The interaction between monetary and macroprudential policy: Should central banks 'lean against the wind' to foster macro-financial stability?," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 12, pages 1-69.
    11. Guangling Liu & Thabang Molise, 2020. "The Optimal Monetary and Macroprudential Policies for the South African Economy," South African Journal of Economics, Economic Society of South Africa, vol. 88(3), pages 368-404, September.
    12. Indrani Manna, 2018. "Can We Still Lean Against the Wind?," Open Economies Review, Springer, vol. 29(2), pages 223-259, April.
    13. Alexandros P. Bechlioulis & Sophocles N. Brissimis, 2020. "Consumer default and optimal consumption decisions," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 48(5), pages 1020-1034, September.
    14. Krug, Sebastian, 2015. "The interaction between monetary and macroprudential policy: Should central banks "lean against the wind" to foster macrofinancial stability?," Economics Working Papers 2015-08, Christian-Albrechts-University of Kiel, Department of Economics.
    15. repec:hal:spmain:info:hdl:2441/5hussro0tc951q0jqpu8quliqu is not listed on IDEAS
    16. Kang, Qiaoling & Wu, Ji & Chen, Minghua & Jeon, Bang Nam, 2021. "Do macroprudential policies affect the bank financing of firms in China? Evidence from a quantile regression approach," Journal of International Money and Finance, Elsevier, vol. 115(C).
    17. Lilit Popoyan, 2020. "Macroprudential Policy: a Blessing or a Curse?," Review of Economics and Institutions, Università di Perugia, vol. 11(1-2).
    18. Clancy, Daragh & Merola, Rossana, 2017. "Countercyclical capital rules for small open economies," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 332-351.
    19. Kaelo Mpho Ntwaepelo, 2021. "The Effects of Macroprudential and Monetary Policy Shocks in BRICS economies," Economics Discussion Papers em-dp2021-20, Department of Economics, University of Reading.
    20. Tayler, William J. & Zilberman, Roy, 2016. "Macroprudential regulation, credit spreads and the role of monetary policy," Journal of Financial Stability, Elsevier, vol. 26(C), pages 144-158.
    21. Mr. Hamid R Tabarraei & Abdelaziz Rouabah & Olivier Pierrard, 2019. "Sovereigns and Financial Intermediaries Spillovers," IMF Working Papers 2019/043, International Monetary Fund.

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    More about this item

    Keywords

    Monetary policy; Inflation (Finance); Credit; Keynesian economics;
    All these keywords.

    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
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other

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