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Benefits of macroprudential policy in low interest rate environments

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  • Van der Ghote, Alejandro

Abstract

The natural rate of interest is the equilibrium real interest rate that is consistent with inflation on target andproduction at full capacity. This article argues that in economies with low natural rates, such as the euroarea today, macroprudential policy can have benefits for the effectiveness of conventional monetarypolicy, in addition to safeguarding financial stability. Notably, macroprudential policies that curb leverageof financial intermediaries during upturns can also help stimulate aggregate demand during downturns.One way they do so is by containing systemic risk in financial markets. As a by-product of the systemicrisk reduction, intermediary financing and aggregate output also become more stable. This additionalreduction in risk boosts the natural rate and thus reduces the likelihood of hitting the effective lower bound(ELB) on policy rates. In numerical simulations conducted for the euro area, the positive effect ofmacroprudential policy on the average natural rate is estimated to be around 0.7%, while the probability ofhitting the ELB declines by around 8%, relative to a benchmark scenario without macroprudential policy. JEL Classification: E31, E32, E44

Suggested Citation

  • Van der Ghote, Alejandro, 2021. "Benefits of macroprudential policy in low interest rate environments," Research Bulletin, European Central Bank, vol. 90.
    • Handle: RePEc:ecb:ecbrbu:2021:0090:
    Note: 2828013
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    References listed on IDEAS

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    1. Thore Kockerols & Erling Motzfeldt Kravik & Yasin Mimir, 2021. "Leaning against persistent financial cycles with occasional crises," Working Paper 2021/11, Norges Bank.

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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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