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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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    File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2012/wp12-28.pdf
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    References listed on IDEAS

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    1. Christiano, Lawrence & Motto, Roberto & Rostagno, Massimo, 2008. "Shocks, structures or monetary policies? The Euro Area and US after 2001," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2476-2506, August.
    2. Gerlach, Stefan & Peng, Wensheng, 2005. "Bank lending and property prices in Hong Kong," Journal of Banking & Finance, Elsevier, vol. 29(2), pages 461-481, February.
    3. Zhang, Longmei, 2009. "Bank capital regulation, the lending channel and business cycles," Discussion Paper Series 1: Economic Studies 2009,33, Deutsche Bundesbank.
    4. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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    Cited by:

    1. Suh, Hyunduk, 2014. "Dichotomy between macroprudential policy and monetary policy on credit and inflation," Economics Letters, Elsevier, vol. 122(2), pages 144-149.
    2. 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.
    3. repec:rbp:esteco:ree-33-04 is not listed on IDEAS

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    Keywords

    Ratio analysis;

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