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Macro-Prudential Policy and the Conduct of Monetary Policy

In: Macroeconomic and Financial Stability: challenges for Monetary Policy

Listed author(s):
  • Denis Beau

    (Banque de France)

  • Christophe Cahn

    (Banque de France)

  • Laurent Clerc

    (Banque de France)

  • Benoît Mojon

    (Banque de France)

In this paper, we analyse the interactions between monetary and macro-prudential policies and the circumstances under which such interactions call for their coordinated implementation. We start with a review of the interdependencies between monetary and macro-prudential policies. Then, we use a DSGE model incorporating financial frictions, heterogeneous agents and housing, which is estimated for the euro area over the period 1985 -2010, to identify the circumstances under which monetary and macro-prudential policies may have compounding, neutral or conflicting impacts on price stability. We compare inflation dynamics across four “policy regimes” depending on: (a) the monetary policy objectives – that is, whether the policy instrument, the short-term interest rate factors in financial stability considerations by leaning against credit growth; and (b) the existence, or not, of an authority in charge of a financial stability objective through the implementation of macro-prudential policies that can “lean against credit” without affecting the short-term interest rate.

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This chapter was published in: Sofía Bauducco & Lawrence Christiano & Claudio Raddatz (ed.) Macroeconomic and Financial Stability: challenges for Monetary Policy, , chapter 9, pages 273-314, 2014.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v19c09pp273-314.
Handle: RePEc:chb:bcchsb:v19c09pp273-314
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