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Monetary policy, macroprudential policy, and financial stability

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  • Martinez-Miera, David
  • Repullo, Rafael

Abstract

This paper reexamines from a theoretical perspective the role of monetary and macroprudential policies in addressing the build-up of risks in the financial system. We construct a stylized general equilibrium model in which the key friction comes from a moral hazard problem in firms financing that banks’ equity capital serves to ameliorate. Tight monetary policy is introduced by open market sales of government debt, and tight macroprudential policy by an increase in capital requirements. We show that both policies are useful, but macroprudential policy is more effective in fostering financial stability and leads to higher social welfare. JEL Classification: G21, G28, E44, E52

Suggested Citation

  • Martinez-Miera, David & Repullo, Rafael, 2019. "Monetary policy, macroprudential policy, and financial stability," Working Paper Series 2297, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20192297
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    Cited by:

    1. Ricardo J. Caballero & Alp Simsek, 2019. "Prudential Monetary Policy," NBER Working Papers 25977, National Bureau of Economic Research, Inc.

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    Keywords

    bank monitoring; capital requirements; financial stability; intermediation margin; macroprudential policy; monetary policy;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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