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Beyond monetary policy: Macroprudential responses to inflationary shocks

Author

Listed:
  • Diana Lima
  • Duarte Maia
  • Paul Levine
  • Jonathan Swarbrick
  • Stylianos Tsiaras

Abstract

The recent period of rising inflationary pressures and monetary policy tightening posed new challenges for macroprudential authorities in the euro area. In a monetary union, national authorities are unable to set independent monetary policy and rely on macroprudential tools to deal with domestic financial imbalances. This paper examines how inflation and interest rate tightening originating in the broader euro area spill over to a small open economy within the union, and assesses the role of national macroprudential policy in mitigating these effects. Using a structural model with banking frictions, housing, and both borrower-based and capital-based instruments, we show that pre-emptive and countercyclical macroprudential policy can strengthen banking sector resilience and dampen the impact of external shocks. In contrast, procyclical tightening may worsen outcomes, particularly when resilience is initially low.

Suggested Citation

  • Diana Lima & Duarte Maia & Paul Levine & Jonathan Swarbrick & Stylianos Tsiaras, 2026. "Beyond monetary policy: Macroprudential responses to inflationary shocks," Working Papers w202609, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w202609
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    File URL: https://www.bportugal.pt/sites/default/files/documents/2026-08/WP202609.pdf
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