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Targeting financial stability: macroprudential or monetary policy?

Author

Listed:
  • David Aikman

    (Bank of England)

  • Julia Giese

    (Bank of England)

  • Sujit Kapadia

    (European Central Bank)

  • Michael McLeay

    (Bank of England)

Abstract

This paper explores monetary-macroprudential policy interactions in a simple, calibrated New Keynesian model incorporating the possibility of a credit boom precipitating a financial crisis and a loss function reflecting financial stability considerations. Deploying the countercyclical capital buffer (CCyB) improves outcomes significantly relative to when interest rates are the only instrument. The instruments are typically substitutes, with monetary policy loosening when the CCyB tightens. We also examine when the instruments are complements and assess how different shocks, the effective lower bound for monetary policy, market-based finance and a risk-taking channel of monetary policy affect our results.

Suggested Citation

  • David Aikman & Julia Giese & Sujit Kapadia & Michael McLeay, 2018. "Targeting financial stability: macroprudential or monetary policy?," Bank of England working papers 734, Bank of England.
    • Handle: RePEc:boe:boeewp:0734
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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