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A policy model to analyze macroprudential regulations and monetary policy

Author

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  • Sami Alpanda
  • Gino Cateau
  • Césaire Meh

Abstract

We construct a small-open-economy, new Keynesian dynamic stochastic general-equilibrium model with real financial linkages to analyze the effects of financial shocks and macroprudential policies on the Canadian economy. The model incorporates rich interactions between the balance sheets of households, firms and banks, long-term household and business debt, macroprudential policy instruments and nominal and real rigidities and is calibrated to match dynamics in Canadian macroeconomic and financial data. We study the transmission of monetary policy and financial and real shocks in the model economy and analyze the effectiveness of various policies in simultaneously achieving macroeconomic and financial stability. We find that, in terms of reducing household debt, more targeted tools such as loan-to-value regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively.

Suggested Citation

  • Sami Alpanda & Gino Cateau & Césaire Meh, 2018. "A policy model to analyze macroprudential regulations and monetary policy," Canadian Journal of Economics, Canadian Economics Association, vol. 51(3), pages 828-863, August.
    • Handle: RePEc:cje:issued:v:51:y:2018:i:3:p:828-863
    DOI: 10.1111/caje.12339
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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