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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 Staff 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
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Web page: http://www.bank-banque-canada.ca/

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  25. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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