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Optimal Simple Rule for Monetary Policy and Macroprudential Policy in a Financial Accelerator Model

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  • Hyunduk Suh

    (Inha University)

Abstract

This paper examines an optimal simple rule for monetary policy and macroprudential policy in a New Keynesian DSGE model with a Bernanke et al. (1999) financial accelerator mechanism. Macroprudential policy is given by countercyclical bank capital regulation or loan-to-value (LTV) ratio regulation. Macroprudential policy can mitigate the inefficiencies arising from financial friction, by reducing the uncertainty related with the solvency risk. It is optimal to separate monetary policy from macroprudential concern and use only macroprudential policy for credit stabilization. Using monetary policy for credit stabilization is sub-optimal because of its tradeoff with inflation stability.

Suggested Citation

  • Hyunduk Suh, 2017. "Optimal Simple Rule for Monetary Policy and Macroprudential Policy in a Financial Accelerator Model," Inha University IBER Working Paper Series 2017-9, Inha University, Institute of Business and Economic Research, revised Aug 2017.
  • Handle: RePEc:inh:wpaper:2017-9
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    More about this item

    Keywords

    Macroprudential policy; monetary policy; countercyclical bank capital regulation; loan-to-value (LTV) ratio regulation; optimal simple rule;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other

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