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Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area

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  • Mr. Dominic Quint
  • Mr. Pau Rabanal

Abstract

In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and financial frictions, and hence both monetary and macroprudential policy can play a role. We find that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policy would always increase the welfare of savers, but their effects on borrowers depend on the shock that hits the economy. In particular, macroprudential policy may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads.

Suggested Citation

  • Mr. Dominic Quint & Mr. Pau Rabanal, 2013. "Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area," IMF Working Papers 2013/209, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2013/209
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    More about this item

    Keywords

    WP; Monetary Policy; EMU; Basel III; Financial Frictions; intermediate goods; credit market; utility function; monetary policy rule; technology shock; monetary policy shock; housing stock; depreciation rate; credit growth; optimal monetary policy; risk shock; labor disutility coefficient; Macroprudential policy; Credit; Housing; Consumption; Inflation;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • 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

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