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On the limits of macroprudential policy

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  • Marcin Kolasa

Abstract

This paper studies how macroprudential policy tools can complement the interest rate-based monetary policy in achieving a selection of dual stabilization objectives. We show analytically in a canonical New Keynesian model with collateral constraints that using the loan-to-value ratio as an additional policy instrument does not resolve the in flation-output volatility tradeoff. Perfect targeting of in ation and either credit or house prices with monetary and macroprudential policy is possible only if the role of credit in the economy is suciently small. Any of these three dual stabilization objectives can be achieved with the monetary-fiscal policy mix. The identifed limits to the LTV ratio-based policy are related to its predominantly intertemporal effect on decisions made by financially constrained agents.

Suggested Citation

  • Marcin Kolasa, 2016. "On the limits of macroprudential policy," Working Papers 2016-002, Warsaw School of Economics, Collegium of Economic Analysis.
  • Handle: RePEc:sgh:kaewps:2016002
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    References listed on IDEAS

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    Cited by:

    1. Torój, Andrzej, 2017. "Managing external macroeconomic imbalances in the EU: the welfare cost of scoreboard-based constraints," Economic Modelling, Elsevier, vol. 61(C), pages 293-311.
    2. repec:oup:cesifo:v:64:y:2018:i:1:p:50-77. is not listed on IDEAS

    More about this item

    Keywords

    macroprudential policy; monetary policy; stabilization tradeoffs;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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