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Macroprudential Interventions in Liquidity Traps

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  • William John Tayler
  • Roy Zilberman

Abstract

We characterize the joint optimal implementation of macroprudential and monetary policies in a New Keynesian model where endogenous supply-side financial frictions generate inflationary credit spreads. State-contingent macroprudential interventions help to stabilize volatile spreads, and substantially alter the transmission of optimal monetary policy under both discretion and commitment. In 'normal times', macroprudential policies replicate the first-best allocation. In liquidity traps, financial interventions remove the zero lower bound restriction on the nominal policy rate, thus minimizing output costs following both deflationary (inflationary) demand (financial) shocks. Discretionary and commitment policies with macroprudential taxes deliver equivalent welfare gains.

Suggested Citation

  • William John Tayler & Roy Zilberman, 2019. "Macroprudential Interventions in Liquidity Traps," Working Papers 257107351, Lancaster University Management School, Economics Department.
  • Handle: RePEc:lan:wpaper:257107351
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    File URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/LancasterWP2019_005.pdf
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    References listed on IDEAS

    as
    1. Tayler, William J. & Zilberman, Roy, 2016. "Macroprudential regulation, credit spreads and the role of monetary policy," Journal of Financial Stability, Elsevier, vol. 26(C), pages 144-158.
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    More about this item

    Keywords

    financial taxation; monetary policy; optimal policy; credit cost channel; credit spreads; zero lower bound;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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