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Will macroprudential policy counteract monetary policy’s effects on financial stability?

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  • Agur, Itai
  • Demertzis, Maria

Abstract

How does monetary policy impact upon macroprudential regulation? This paper models monetary policy’s transmission to bank risk, and its interaction with a regulator’s optimization problem. The regulator uses capital regulation to affect financial stability, while taking account of the impact on financial intermediation. A change in the monetary policy rate tilts the regulator’s entire trade-off. We show that the regulator allows interest rate changes to partly “pass through” to bank soundness by not neutralizing the bank risk channel of monetary policy. Thus, monetary policy affects financial stability, even in the presence of macroprudential regulation.

Suggested Citation

  • Agur, Itai & Demertzis, Maria, 2019. "Will macroprudential policy counteract monetary policy’s effects on financial stability?," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 65-75.
    • Handle: RePEc:eee:ecofin:v:48:y:2019:i:c:p:65-75
    DOI: 10.1016/j.najef.2019.01.012
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    8. Pozo, Jorge, 2019. "Bank Risk-Taking in a Small Open Economy," Working Papers 2019-016, Banco Central de Reserva del Perú.
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    12. Huang, Yiping & Li, Xiang & Wang, Chu, 2021. "What does peer-to-peer lending evidence say about the Risk-Taking Channel of monetary policy?," Journal of Corporate Finance, Elsevier, vol. 66(C).
    13. repec:zbw:bofitp:2019_016 is not listed on IDEAS
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    More about this item

    Keywords

    Macroprudential; Leverage; Transmission; E43; E52; E61; G01; G21; G28;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

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