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Institutional Mandates for Macroeconomic and Financial Stability

Listed author(s):
  • Pierre-Richard Agénor
  • Alessandro Flamini

The performance of alternative institutional policy mandates for achieving macroeconomic and financial stability is studied in a model with financial frictions. These mandates involve goal-integrated, goal-distinct, and common-goal mandates for the monetary authority and the financial regulator. In the first case both monetary and macroprudential policies are set optimally, but in the last two cases monetary policy only is set optimally whereas macroprudential policy is implemented through a simple, credit-based reserve requirement rule. The model is parameterized and used to simulate responses to a financial shock. The analysis shows that the goal-integrated mandate performs better than the other mandates in terms of promoting macroeconomic and financial stability. The benefit of using the required reserve ratio is also substantial under that mandate. In addition, it is optimal to delegate the financial stability goal solely to the monetary authority when the financial regulator is only equipped with a credit-based reserve rule. The key reason for these findings is that only the integrated mandate can fully internalize the policy spillovers which adversely affect economic stability

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File URL: http://hummedia.manchester.ac.uk/schools/soss/cgbcr/discussionpapers/dpcgbcr231.pdf
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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 231.

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Length: 50 pages
Date of creation: 2016
Handle: RePEc:man:cgbcrp:231
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Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/centre-for-growth-and-business-cycle-research/

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