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Optimal Monetary and Macroprudential Policy in a Currency Union

Listed author(s):
  • Jakob Palek

    ()

    (University of Kassel)

  • Benjamin Schwanebeck

    ()

    (University of Kassel)

The financial crisis proved strikingly that stabilizing the price level is a necessary but not a sufficient condition to ensure macroeconomic stability. The obvious candidate for addressing systemic risk is macroprudential policy. In this paper we study the optimal monetary and macroprudential policy mix in a currency union in the case of different kinds of aggregate and idiosyncratic shocks. The monetary and macroprudential instruments are modelled as independent tools. With a union-wide macroprudential tool, full absorption on the aggregate level is possible, but welfare losses due to fluctuations in relative variables prevail. With country-specific macroprudential tools, full absorption of shocks is always possible. But it is only optimal as long as there is no inefficient labor allocation. Comparing different policy regimes, we get the following ranking in terms of welfare: discretion outperforms strict inflation targeting which outperforms a (euro-area based) Taylor Rule.

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File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/paper_2015/22-2015_palek.pdf
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Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number 201522.

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Length: 37 pages
Date of creation: 2015
Publication status: Forthcoming in
Handle: RePEc:mar:magkse:201522
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Universitätsstraße 25, 35037 Marburg

Phone: 06421/28-1722
Fax: 06421/28-4858
Web page: http://www.uni-marburg.de/fb02/
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