Adding Macroprudential Policy to the Mix: When Monetary, Fiscal and Macroprudential Authorities Interact

We examine a framework in which fiscal, monetary, and macroprudential policies interact. We study a range of settings in which policy is conducted optimally, allowing for cooperative, non-cooperative and leadership policy frameworks. We find that there are important interactions between the three policies such that (full) cooperation involving all three policymakers offers substantial advantages over non-cooperation. Importantly, we find that much of the gain to full cooperation can be achieved through a partial cooperation setting whereby monetary policy and macroprudential policy cooperate while remaining independent of fiscal policy. This finding supports institutional frameworks in which macroprudential policy is conducted by central banks or from within central banks. Partial cooperation involving fiscal policy and macroprudential policy performs poorly, leading to worse outcomes than non-cooperation. Our findings are robust to a range of alternative settings involving different assignment of objectives. For our model, we find little or no advantage to policy leadership.