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Interactions between monetary and macroprudential policies

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  • Matheron, J.
  • Antipa, P.

Abstract

This article reviews the potential tensions between monetary and macroprudential policies and tries to quantitatively evaluate their importance. Both types of policies have overlapping transmission mechanisms, since they primarily work through the financial system. One policy shapes the playing field of the other. Thus, the effects of one policy need to be considered in the conception and implementation of the other, very much the same way as policy makers already take into account other structural economic features that affect the level and composition of output. In order to evaluate how quantitatively important these interactions are we simulate a dynamic stochastic general equilibrium model that we calibrate to euro area data. The model encompasses, among others, financial frictions that manifest themselves as a collateral constraint. Macroprudential policy is modeled as a countercyclical variation in the intensity of the latter. We embed three macroeconomic shocks that illustrate the key propagation and amplification mechanisms of the Great Recession. Finally, we explicitly consider the zero lower bound (ZLB) on nominal interest rates. Given this set-up, our main findings are: • macroprudential policies act as a useful complement to monetary policy during crises, by attenuating the decrease in investment and, hence, output; • forward guidance is very effective at the ZLB, by providing a substantial boost to demand and reducing the costs of private deleveraging at the same time; • overall, countercyclical macroprudential policies do not undo the benefits of forward guidance, but rather sustain them.

Suggested Citation

  • Matheron, J. & Antipa, P., 2014. "Interactions between monetary and macroprudential policies," Financial Stability Review, Banque de France, issue 18, pages 225-240, April.
  • Handle: RePEc:bfr:fisrev:2014:18:22
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    Cited by:

    1. Pierre-Charles Pradier & Hamza El Khalloufi, 2016. "The Impact of regulatory capital regulation on balance sheet structure, intermediation cost and growth," Documents de travail du Centre d'Economie de la Sorbonne 16061, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    2. Rubio, Margarita & Yao, Fang, 2020. "Bank capital, financial stability and Basel regulation in a low interest-rate environment," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 378-392.
    3. Pierre-Charles Pradier & Hamza El Khalloufi, 2016. "The Impact of regulatory capital regulation on balance sheet structure, intermediation cost and growth," Post-Print halshs-01390915, HAL.
    4. Fang Yao & Margarita Rubio, 2017. "Macroprudential policies in a low interest-rate environment," Reserve Bank of New Zealand Discussion Paper Series DP2017/04, Reserve Bank of New Zealand.
    5. Oriol Carreras & E Philip Davis & Rebecca Piggott, 2016. "Macroprudential tools, transmission and modelling," National Institute of Economic and Social Research (NIESR) Discussion Papers 470, National Institute of Economic and Social Research.
    6. Lukáš Pfeifer & Zdeněk Pikhart, 2015. "Vliv měnových podmínek na jednotlivé kategorie cen v České Republice v kontextu měnové a makroobezřetnostní politiky [The Effect of Monetary Conditions on Individual Categories of Prices in the Cze," Politická ekonomie, University of Economics, Prague, vol. 2015(8), pages 948-966.
    7. Velauthapillai, Jeyakrishna, 2015. "Makroprudenzielle Regulierung – eine kurze Einführung und ein Überblick," EconStor Preprints 116781, ZBW - Leibniz Information Centre for Economics.
    8. Gerba, Eddie & Macchiarelli, Corrado, 2016. "Interaction between monetary policy and bank regulation: theory and European practice," LSE Research Online Documents on Economics 68344, London School of Economics and Political Science, LSE Library.
    9. Oriol Carreras & E Philip Davis & Ian Hurst & Iana Liadze & Rebecca Piggott & James Warren, 2018. "Implementing Macroprudential Policy in NiGEM," National Institute of Economic and Social Research (NIESR) Discussion Papers 490, National Institute of Economic and Social Research.

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