Impact of monetary and macroprudential policy shocks on systemic risk: what role for the central bank governance ?

This paper studies the impact of the Bank of England’s (BoE) governance on the effect of the interaction between monetary policy and macroprudential policy on financial stability, measured by the credit-to-GDP gap. We approximate macroprudential policy with financial stability publication sentiments. We construct monetary policy shocks and financial stability sentiment shocks following the approach of Romer and Romer [2004]. Local Projections estimates of Jordà [2005] show that the interaction between monetary policy shocks and financial stability sentiment shocks reduces the credit gap, regardless of whether the two shocks move in the same or opposite direc- tions. The decline in the credit gap is rather observed after the reorganisation of the BoE’s governance structure in 2011, particularly after the creation of the Financial Policy Committee within the BoE. Further extension suggests that monetary policy communication adds information to macroprudential policy communication that influences financial agents’ beliefs about UK systemic risk, when the two policy domains are under the central bank’s umbrella