Macroprudential and Monetary Policies: Implications for Financial Stability and Welfare
AbstractIn this paper, we analyse the implications of macroprudential and monetary policies for business cycles, welfare, and .nancial stability. We consider a dynamic stochastic general equilibrium (DSGE) model with housing and collateral constraints. A macroprudential rule on the loan-to-value ratio (LTV), which responds to output and house price deviations, interacts with a traditional Taylor rule for monetary policy. From a positive perspective, introducing a macroprudential tool mitigates the effects of booms in the economy by restricting credit. However, monetary and macroprudential policies may enter in conflict when shocks come from the supply-side of the economy. From a normative point of view, results show that the introduction of this macroprudential measure is welfare improving. Then, we calculate the combination of policy parameters that maximizes welfare and find that the optimal LTV rule should respond relatively more aggressively to house prices than to output deviations. Finally, we study the efficiency of the policy mix. We propose a tool that includes not only the variability of output and inflation but also the variability of borrowing, to capture the effects of policies on financial stability: a three-dimensional policy frontier (3DPF). We find that both policies acting together unambiguously improve the stability of the system.
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Bibliographic InfoPaper provided by University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) in its series Discussion Papers with number 2013/04.
Date of creation: 2013
Date of revision:
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Macroprudential; monetary policy; welfare; financial stability; three-dimensional policy frontier; loan-to-value; Taylor curve;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-25 (All new papers)
- NEP-BAN-2013-10-25 (Banking)
- NEP-CBA-2013-10-25 (Central Banking)
- NEP-DGE-2013-10-25 (Dynamic General Equilibrium)
- NEP-MAC-2013-10-25 (Macroeconomics)
- NEP-MON-2013-10-25 (Monetary Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Macroprudential and Monetary Policies: Implications for Financial Stability and Welfare
by Christian Zimmermann in NEP-DGE blog on 2013-10-30 02:09:42
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