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Macroprudential Policy Implementation in a Heterogeneous Monetary Union

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  • Margarita Rubio

Abstract

I develop a two-country new Keynesian general equilibrium model with housing and collateral constraints to explore how macroprudential policies should be conducted in a heterogeneous monetary union. I consider four types of cross-country heterogeneity: asymmetric shocks, different loan-to-value ratios (LTV), different proportion of borrowers, and mortgage contract heterogeneity (fixed and variable rates). As a macroprudential tool, I propose a Taylor-type rule for the LTV which responds to deviations in output and house prices. This policy can be applied at a national or union level. Results show that asymmetries matter for the implementation of macroprudential policies, especially when the heterogeneity delivers differences in economic and financial volatilities. A centralized macroprudential policy is preferred if there is an asymmetric shock, to balance out the cross-country different financial volatilities. For the mortgage contract heterogeneity, the economy is better off with a decentralized policy that compensates the lack of effectiveness of monetary policy in the fixed-rate country. For the LTV asymmetry and the different proportion of borrowers, conducting the macroprudential policy at a national or union level produces similar welfare gains.

Suggested Citation

  • Margarita Rubio, 2014. "Macroprudential Policy Implementation in a Heterogeneous Monetary Union," Discussion Papers 2014/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  • Handle: RePEc:not:notcfc:14/03
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    Cited by:

    1. Darracq Pariès, Matthieu & Kok, Christoffer & Rancoita, Elena, 2019. "Macroprudential policy in a monetary union with cross-border banking," Working Paper Series 2260, European Central Bank.
    2. Mariarosaria Comunale, 2017. "Synchronicity of real and financial cycles and structural characteristics in EU countries," CEIS Research Paper 414, Tor Vergata University, CEIS, revised 25 Sep 2017.
    3. Dominic Quint & Pau Rabanal, 2014. "Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 10(2), pages 169-236, June.
    4. Marcin Bielecki & Michał Brzoza‐Brzezina & Marcin Kolasa & Krzysztof Makarski, 2019. "Could the Boom‐Bust in the Eurozone Periphery Have Been Prevented?," Journal of Common Market Studies, Wiley Blackwell, vol. 57(2), pages 336-352, March.
    5. Salim Dehmej & Leonardo Gambacorta, 2019. "Macroprudential Policy in a Monetary Union," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 61(2), pages 195-212, June.
    6. Agénor, Pierre-Richard & Jackson, Timothy & Jia, Pengfei, 2021. "Macroprudential policy coordination in a currency union," European Economic Review, Elsevier, vol. 137(C).
    7. Malmierca, María, 2022. "Stabilization and the policy mix in a monetary union," The Quarterly Review of Economics and Finance, Elsevier, vol. 83(C), pages 92-118.
    8. Palek, Jakob & Schwanebeck, Benjamin, 2019. "Optimal monetary and macroprudential policy in a currency union," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 167-186.
    9. Dmitriy Sergeyev, 2016. "Optimal Macroprudential and Monetary Policy in a Currency Union," 2016 Meeting Papers 463, Society for Economic Dynamics.
    10. Financial Stability Committee, Task Force on cross-border Spillover Effects of macroprudential measures & Kok, Christoffer & Reinhardt, Dennis, 2020. "Cross-border spillover effects of macroprudential policies: a conceptual framework," Occasional Paper Series 242, European Central Bank.
    11. Malmierca, María, 2021. "International financial positions and macroprudential policy," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1034-1062.

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    Keywords

    Macroprudential; Housing market; LTV; monetary union; financial stability;
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