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Concerted efforts? Monetary policy and macro-prudential tools

Author

Listed:
  • Ferrero, Andrea

    () (Oxford University)

  • Harrison, Richard

    () (Bank of England)

  • Nelson, Ben

    () (Bank of England)

Abstract

The inception of macro-prudential policy frameworks in the wake of the global financial crisis raises questions of how macro-prudential and monetary policies should be coordinated. We examine these questions through the lens of a macroeconomic model featuring nominal rigidities, housing, incomplete risk-sharing between borrower and saver households, and macro-prudential tools in the form of mortgage loan-to-value and bank capital requirements. We derive a welfare-based loss function which suggests a role for active macro-prudential policy to enhance risk sharing. Macro-prudential policy faces trade-offs, however, and complete macro-prudential stabilization is not generally possible in our model. Nonetheless, simulations of a house price boom and subsequent correction suggest that macro-prudential tools could alleviate debt-deleveraging and help avoid zero lower bound episodes, even when macro-prudential tools themselves impose only occasionally binding constraints on debt dynamics in the economy.

Suggested Citation

  • Ferrero, Andrea & Harrison, Richard & Nelson, Ben, 2018. "Concerted efforts? Monetary policy and macro-prudential tools," Bank of England working papers 727, Bank of England.
  • Handle: RePEc:boe:boeewp:0727
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    References listed on IDEAS

    as
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    Cited by:

    1. Matthieu Darracq Paries & Jenny Korner & Niki Papadopoulou, 2019. "Empowering Central Bank Asset Purchases: The Role of Financial Policies," Working Papers 2019-1, Central Bank of Cyprus.
    2. Maria Chiara Cavalleri & Boris Cournède & Volker Ziemann, 2019. "Housing markets and macroeconomic risks," OECD Economics Department Working Papers 1555, OECD Publishing.

    More about this item

    Keywords

    Monetary policy; macro-prudential policy; time-consistent policy; policy coordination; occasionally binding constraints;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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