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Monetary Policy and Credit Cycles: A DSGE Analysis

Author

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  • Florina-Cristina Badarau

    (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - UB - Université de Bordeaux)

  • Alexandra Popescu

    (LEO - Laboratoire d'Économie d'Orleans [UMR7322] - UO - Université d'Orléans - UT - Université de Tours - CNRS - Centre National de la Recherche Scientifique)

Abstract

The recent fi nancial crisis revealed several flaws in both monetary and fi nancial regulation. Contrary to what was believed, price stability is not a suffi cient condition for financial stability. At the same time, micro-prudential regulation alone becomes insu fficient to ensure the financial stability objective. In this paper, we propose an ex-post analysis of what a central bank could have done to improve the reaction of the economy to the financial bubble. We study by means of a fi nancial accelerator DSGE model the dynamics of our economy when the central bank has, fi rst, only traditional objectives, and second, when an additional financial stability objective is added. Overall, results indicate that a more aggressive monetary policy would have had little success in improving the response of the economy to the financial bubble, as the actions of the central bank would have remained limited by the use of a single instrument, the interest rate.

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  • Florina-Cristina Badarau & Alexandra Popescu, 2012. "Monetary Policy and Credit Cycles: A DSGE Analysis," Working Papers halshs-00828074, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00828074
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00828074
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    7. KORKMAZ, Özge & ERER, Elif & ERER, Deniz, 2016. "The Factors Affecting Credit Bubbles: The Case Of Turkey," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 20(1), pages 37-53.
    8. Lyu, Juyi & Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2023. "UK monetary policy in an estimated DSGE model with financial frictions," Journal of International Money and Finance, Elsevier, vol. 130(C).
    9. Prabheesh, K.P. & Anglingkusumo, Reza & Juhro, Solikin M., 2021. "The dynamics of global financial cycle and domestic economic cycles: Evidence from India and Indonesia," Economic Modelling, Elsevier, vol. 94(C), pages 831-842.
    10. Sumei Luo & Guangyou Zhou & Jinpeng Zhou, 2021. "The Impact of Electronic Money on Monetary Policy: Based on DSGE Model Simulations," Mathematics, MDPI, vol. 9(20), pages 1-26, October.
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    12. Grégory Levieuge, 2018. "La politique monétaire doit-elle être utilisée à des fins de stabilité financière ?," Revue française d'économie, Presses de Sciences-Po, vol. 0(3), pages 63-104.
    13. Hyun, Junghwan, 2016. "Financial crises and the evolution of credit reallocation: Evidence from Korea," Economic Modelling, Elsevier, vol. 56(C), pages 25-34.
    14. Lyu, Juyi & Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2021. "Macroprudential regulation in the post-crisis era: Has the pendulum swung too far?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
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    Keywords

    bank capital channel; credit cycles; financial stability; monetary policy.; canal du capital bancaire; cycle de cr édit; stabilit é financi ère; politique mon étaire.;
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