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Optimal Macroprudential Policy

  • Ko Munakata
  • Koji Nakamura
  • Yuki Teranishi

We introduce financial market friction through search and matching in the loan market into a standard New Keynesian model. We reveal that the second order approximation of social welfare includes the terms related to credit, such as credit market tightness, the volume of credit, and the loan separation rate, in addition to the inflation rate and consumption under financial market friction. Our analytical result justifies why optimal policy should take credit variation into account. We introduce monetary policy and macroprudential policy measures for financial stability into the model. The optimal outcome is achieved through monetary and macroprudential policies by taking into account not only price stability but also financial stability.

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File URL: https://cama.crawford.anu.edu.au/files/publication/cama_crawford_anu_edu_au/2013-08/51_2013_munakata_nakamura_teranishi.pdf
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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2013-51.

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Length: 6 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:een:camaaa:2013-51
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  18. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
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