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Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area

  • Pau Rabanal

    (IMF)

  • Dominic Quint

    (Free University Berlin)

In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and financial frictions, and hence both monetary and macroprudential policies can play a role. We find that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policies always increase the welfare of savers, but their effects on borrowers depend on the shock that hits the economy. In particular, macroprudential policies may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 604.

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Date of creation: 2013
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Handle: RePEc:red:sed013:604
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