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Macroprudential policy: its effects and relationship to monetary policy

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  • Hyunduk Suh

Abstract

This paper examines the interactions of macroprudential policy and monetary policy in a New Keynesian DSGE model with financial frictions. Macroprudential policy can stabilize credit cycles. However, a macroprudential instrument that aims to stabilize a specific segment of the credit market can cause regulatory arbitrage, that is, a reallocation of credit to a less regulated part of the market. Within this model, welfare-maximizing monetary policy aims to stabilize only inflation and macroprudential policy only stabilizes credit. Two aspects of the model account for this dichotomy. First, credit stabilization is welfare improving because lower volatility is compensated by higher mean equilibrium credit and capital. Second, monetary policy is sub-optimal for credit stabilization. The reason is that it operates on the decisions of borrowers and savers, while macroprudential policy operates only on the decisions of borrowers.

Suggested Citation

  • Hyunduk Suh, 2012. "Macroprudential policy: its effects and relationship to monetary policy," Working Papers 12-28, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:12-28
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    References listed on IDEAS

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    Cited by:

    1. Francesco Lamperti & Antoine Mandel & Mauro Napoletano & Alessandro Sapio & Andrea Roventini & Tomas Balint & Igor Khorenzhenko, 2017. "Taming macroeconomic instability," PSE-Ecole d'économie de Paris (Postprint) hal-03399574, HAL.
    2. Ben-Gad, Michael & Pearlman, Joseph & Sabuga, Ivy, 2022. "An analysis of monetary and macroprudential policies in a DSGE model with reserve requirements and mortgage lending," Economic Modelling, Elsevier, vol. 116(C).
    3. Vinicius Phillipe de Albuquerquemello & Cássio Besarria, 2020. "Rental market and macroeconomics: evidence for the US," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 48(3), pages 587-603, August.
    4. Rojas, Carlos, 2017. "Políticas monetaria y macroprudencial óptimas post Basilea III," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 33, pages 57-94.
    5. Alan Finkelstein-Shapiro & Andrés González Gómez, 2015. "Macroprudential Policy and Labor Market Dynamics in Latin America," IDB Publications (Working Papers) 88738, Inter-American Development Bank.
    6. repec:spo:wpmain:info:hdl:2441/5hussro0tc951q0jqpu8quliqu is not listed on IDEAS
    7. Bardoscia, Marco & Carro, Adrian & Hinterschweiger, Marc & Napoletano, Mauro & Popoyan, Lilit & Roventini, Andrea & Uluc, Arzu, 2025. "The impact of prudential regulation on the UK housing market and economy: Insights from an agent-based model," Journal of Economic Behavior & Organization, Elsevier, vol. 229(C).
    8. Suh, Hyunduk, 2014. "Dichotomy between macroprudential policy and monetary policy on credit and inflation," Economics Letters, Elsevier, vol. 122(2), pages 144-149.
    9. Lilit Popoyan, 2020. "Macroprudential Policy: a Blessing or a Curse?," Review of Economics and Institutions, Università di Perugia, vol. 11(1-2).
    10. Emmanuel Carré & Jézabel Couppey-Soubeyran & Salim Dehmej, 2015. "La coordination entre politique monétaire et politique macroprudentielle. Que disent les modèles dsge ?," Revue économique, Presses de Sciences-Po, vol. 66(3), pages 541-572.

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