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Macroprudential Rules and Monetary Policy when Financial Frictions Matter

  • Jeannine Bailliu
  • Césaire Meh
  • Yahong Zhang

This paper examines the interaction between monetary policy and macroprudential policy and whether policy makers should respond to financial imbalances. To address this issue, we build a dynamic general equilibrium model that features financial market frictions and financial shocks as well as standard macroeconomic shocks. We estimate the model using Canadian data. Based on these estimates, we show that it is beneficial to react to financial imbalances. The size of these benefits depends on the nature of the shock where the benefits are larger in the presence of financial shocks that have broader effects on the macroeconomy.

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2012/02/wp2012-06.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 12-6.

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Length: 37 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:bca:bocawp:12-6
Contact details of provider: Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
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Web page: http://www.bank-banque-canada.ca/

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  1. King, Michael R. & Santor, Eric, 2008. "Family values: Ownership structure, performance and capital structure of Canadian firms," Journal of Banking & Finance, Elsevier, vol. 32(11), pages 2423-2432, November.
  2. Urban Jermann & Vincenzo Quadrini, 2007. "Financial Innovations and Macroeconomic Volatility," 2007 Meeting Papers 50, Society for Economic Dynamics.
  3. Francisco Covas & Yahong Zhang, 2008. "Price-Level versus Inflation Targeting with Financial Market Imperfections," Working Papers 08-26, Bank of Canada.
  4. Faia, Ester & Monacelli, Tommaso, 2007. "Optimal interest rate rules, asset prices, and credit frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3228-3254, October.
  5. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January.
  6. Ali Dib & Caterina Mendicino & Yahong Zhang, 2008. "Price Level Targeting in a Small Open Economy with Financial Frictions: Welfare Analysis," Working Papers 08-40, Bank of Canada.
  7. Riccardo Fiorito & Giulio Zanella, . "Labor Supply Elasticities: Can Micro be Misleading for Macro?," Working Papers 4, Department of the Treasury, Ministry of the Economy and of Finance.
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