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Macroprudential and Monetary Policy Rules: a Welfare Analysis

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  • Margarita Rubio
  • José A. Carrasco-Gallego

Abstract

type="main"> This paper studies the interaction between macroprudential and monetary policies, using a DSGE model with a housing market and collateral constraints. Monetary policy follows a standard Taylor rule for the interest rate. The macroprudential authority implements a Taylor-type rule for the loan-to-value, ratio reacting to output and house prices. Results show that introducing the macroprudential rule or extending the interest-rate rule to respond to house prices increases welfare, since it enhances financial stability. However, for the optimal policy mix, when both policies act together, monetary policy should ensure price stability while the macroprudential authority should safeguard financial stability.

Suggested Citation

  • Margarita Rubio & José A. Carrasco-Gallego, 2015. "Macroprudential and Monetary Policy Rules: a Welfare Analysis," Manchester School, University of Manchester, vol. 83(2), pages 127-152, March.
  • Handle: RePEc:bla:manchs:v:83:y:2015:i:2:p:127-152
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    File URL: http://hdl.handle.net/10.1111/manc.12078
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    References listed on IDEAS

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    5. Rubio, Margarita & Carrasco-Gallego, José A., 2014. "Macroprudential and monetary policies: Implications for financial stability and welfare," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 326-336.
    6. Smets, Frank & Wouters, Raf, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 0171, European Central Bank.
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    9. Smets, Frank & Wouters, Raf, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 171, European Central Bank.
    10. Bennett T. McCallum, 2001. "Should Monetary Policy Respond Strongly to Output Gaps?," American Economic Review, American Economic Association, vol. 91(2), pages 258-262, May.
    11. Frank Smets & Raf Wouters, 2002. "Monetary policy in an estimated stochastic dynamic general equilibrium model of the Euro area," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    12. repec:fip:fedgsq:y:2010:i:oct11 is not listed on IDEAS
    13. Kannan Prakash & Rabanal Pau & Scott Alasdair M., 2012. "Monetary and Macroprudential Policy Rules in a Model with House Price Booms," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-44, June.
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    Cited by:

    1. Chiara Punzo & Lorenza Rossi, 2019. "The Redistributive Effects of a Money-Financed Fiscal Stimulus," DISCE - Working Papers del Dipartimento di Economia e Finanza def076, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    2. Verona, Fabio & Martins, Manuel M.F. & Drumond, Inês, 2017. "Financial shocks, financial stability, and optimal Taylor rules," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 187-207.
    3. repec:ebl:ecbull:eb-18-00483 is not listed on IDEAS
    4. Leonardo Nogueira Ferreira & Márcio Issao Nakane, 2018. "Macroprudential policy in a DSGE model: anchoring the countercyclical capital buffer," Economics Bulletin, AccessEcon, vol. 38(4), pages 2345-2352.
    5. repec:eee:jhouse:v:37:y:2017:i:c:p:1-21 is not listed on IDEAS
    6. Klingelhöfer, Jan & Sun, Rongrong, 2017. "Macroprudential Policy, Central Banks and Financial Stability: Evidence from China," MPRA Paper 79033, University Library of Munich, Germany.
    7. repec:eee:dyncon:v:93:y:2018:i:c:p:315-331 is not listed on IDEAS
    8. repec:bla:manchs:v:85:y:2017:i::p:79-103 is not listed on IDEAS
    9. Margarita Rubio, 2015. "Monetary and Macroprudential Policies under Fixed and Variable Interest Rates," Discussion Papers 2015/10, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    10. Christian Friedrich & Kristina Hess & Rose Cunningham, 2015. "Monetary Policy and Financial Stability: Cross-Country Evidence," Staff Working Papers 15-41, Bank of Canada.
    11. Rubio, Margarita & Carrasco-Gallego, José A., 2016. "Coordinating macroprudential policies within the Euro area: The case of Spain," Economic Modelling, Elsevier, vol. 59(C), pages 570-582.
    12. repec:eee:ecosys:v:42:y:2018:i:1:p:75-90 is not listed on IDEAS
    13. Rubio, Margarita, 2016. "Short and long-term interest rates and the effectiveness of monetary and macroprudential policies," Journal of Macroeconomics, Elsevier, vol. 47(PA), pages 103-115.
    14. repec:oup:cesifo:v:64:y:2018:i:1:p:50-77. is not listed on IDEAS
    15. Kilponen, Juha & Orjasniemi, Seppo & Ripatti, Antti & Verona, Fabio, 2016. "The Aino 2.0 model," Research Discussion Papers 16/2016, Bank of Finland.

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