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Macroprudential policy and imbalances in the euro area

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Abstract

Since its creation the euro area suffered from imbalances between its core and peripheral members. This paper checks whether macroprudential policy applied to the peripheral countries could contribute to providing more macroeconomic stability in this region. To this end we build a twoeconomy macrofinancial DSGE model and simulate the effects of macroprudential policies under the assumption of asymmetric shocks hitting the core and the periphery. We find that macroprudential policy is able to partly make up for the loss of independent monetary policy in the periphery. Moreover, LTV policy seems more efficient than regulating capital adequacy ratios. However, for the policies to be effective, they must be set individually for each region. Area-wide policy is almost ineffective in this respect.

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Bibliographic Info

Paper provided by National Bank of Poland, Economic Institute in its series National Bank of Poland Working Papers with number 138.

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Length: 38
Date of creation: 2013
Date of revision:
Handle: RePEc:nbp:nbpmis:138

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Keywords: euro-area imbalances; macroprudential policy; DSGE with banking sector;

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Cited by:
  1. Pau Rabanal & Dominic Quint, 2013. "Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area," 2013 Meeting Papers 604, Society for Economic Dynamics.

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