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Will macroprudential policy counteract monetary policy’s effects on financial stability?

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  • Itai Agur
  • Maria Demertzis

Abstract

How does monetary policy impact upon macroprudential regulation? This paper models monetary policy’s transmission to bank risk taking, and its interaction with a regulator’s optimization problem. The regulator uses its macroprudential tool, a leverage ratio, to maintain financial stability, while taking account of the impact on credit provision. A change in the monetary policy rate tilts the regulator’s entire trade-off. The authors show that the regulator allows interest rate changes to partly “pass through” to bank soundness by not neutralizing the risk-taking channel of monetary policy. Thus, monetary policy affects financial stability, even in the presence of macroprudential regulation

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  • Itai Agur & Maria Demertzis, 2018. "Will macroprudential policy counteract monetary policy’s effects on financial stability?," Working Papers 23907, Bruegel.
  • Handle: RePEc:bre:wpaper:23907
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    Cited by:

    1. Donato Masciandaro, 2018. "Central Banks And Macroprudential Policies: Economics And Politics," BAFFI CAREFIN Working Papers 1878, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Maria Demertzis & Guntram B. Wolff, 2016. "What impact does the ECB’s quantitative easing policy have on bank profitability?," Policy Contributions 17913, Bruegel.
    3. Gabriele Galati & Richhild Moessner, 2018. "What Do We Know About the Effects of Macroprudential Policy?," Economica, London School of Economics and Political Science, vol. 85(340), pages 735-770, October.
    4. Becker, Chris & Ossandon Busch, Matias & Tonzer, Lena, 2017. "Macroprudential policy and intra-group dynamics: The effects of reserve requirements in Brazil," IWH Discussion Papers 21/2017, Halle Institute for Economic Research (IWH).
    5. repec:eee:ecmode:v:73:y:2018:i:c:p:55-70 is not listed on IDEAS

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