Macro prudential Policies and Financial Stability
The paper attempts to assess to what extent the central bank or the government should respond to developments that can cause financial instability, such as housing or asset bubbles, overextended budgetary policies, or excessive public and household debt. To analyse this question we set up a simple reduced-form model in which monetary and fiscal policy interact, and imbalances (bubbles) can occur in the medium-run. Considering several scenarios with both benevolent and idiosyncratic policy-makers, the analysis shows that the answer depends on a number of characteristics of the economy, as well as on the monetary and fiscal policy preferences with respect to inflation and output stabilization. We show that socially optimal financial instability prevention should be carried out by: (i) both monetary and fiscal policy (sharing region) under some circumstances, and (ii) fiscal policy only (specialization region) under others. There is however a moral hazard problem: both policy-makers have an incentive to be insufficiently pro-active in safeguarding financial stability, and shift the responsibility to the other policy. Specifically, under a range of circumstances we obtain a situation in which neither policy mitigates instability threats (indifference region). These results can be related to the build-up of the current global financial crisis, and have strong implications for the optimal design of the delegation process.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Pierre Siklos & Martin Bohl, 2009.
"Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule,"
Open Economies Review,
Springer, vol. 20(1), pages 39-59, February.
- P. Siklos & M. Bohl, 2006. "Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule," Working Papers eg0053, Wilfrid Laurier University, Department of Economics, revised 2006.
- Pierre L. Siklos & Martin T. Bohl, 2007. "Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule," Working Paper Series 32_07, The Rimini Centre for Economic Analysis.
- Andrew Hughes Hallett & Jan Libich & Petr Stehlík, 2011.
"Welfare Improving Coordination of Fiscal and Monetary Policy,"
Czech Economic Review,
Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 5(1), pages 007-026, March.
- Andrew Hughes Hallet & Jan Libich & Petr Stehlik, 2008. "Welfare Improving Coordination Of Fiscal And Monetary Policy," CAMA Working Papers 2008-04, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- Frederic S. Mishkin, 2001. "The Transmission Mechanism and the Role of Asset Prices in Monetary Policy," NBER Working Papers 8617, National Bureau of Economic Research, Inc.
- Tommaso Monacelli & Ester Faia, 2005.
"Optimal Interest Rate Rules, Asset Prices and Credit Frictions,"
Computing in Economics and Finance 2005
452, Society for Computational Economics.
- Faia, Ester & Monacelli, Tommaso, 2007. "Optimal interest rate rules, asset prices, and credit frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3228-3254, October.
- Faust, Jon & Svensson, Lars E O, 2002.
"The Equilibrium Degree of Transparency and Control in Monetary Policy,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 34(2), pages 520-539, May.
- Jon Faust & Lars E.O. Svensson, 1999. "The Equilibrium Degree of Transparency and Control in Monetary Policy," NBER Working Papers 7152, National Bureau of Economic Research, Inc.
- Svensson, Lars & Faust, Jon, 1999. "The Equilibrium Degree of Transparency and Control in Monetary Policy," Seminar Papers 669, Stockholm University, Institute for International Economic Studies.
- Faust, Jon & Svensson, Lars E O, 1999. "The Equilibrium Degree of Transparency and Control in Monetary Policy," CEPR Discussion Papers 2195, C.E.P.R. Discussion Papers.
- Faust, J. & Svensson, L.E.O., 1999. "The Equilibrium Degree of Transparency and Control in Monetary Policy," Papers 669, Stockholm - International Economic Studies.
- Jon Faust & Lars E. O. Svensson, 1999. "The equilibrium degree of transparency and control in monetary policy," International Finance Discussion Papers 651, Board of Governors of the Federal Reserve System (U.S.).
- Charles Bean, 2003.
"Asset Prices, Financial Imbalances and Monetary Policy: Are Inflation Targets Enough?,"
RBA Annual Conference Volume,
in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy
Reserve Bank of Australia.
- Charles Bean, 2003. "Asset prices, financial imbalances and monetary policy: are inflation targets enough?," BIS Working Papers 140, Bank for International Settlements.
- Olivier Blanchard, 2009.
"The State of Macro,"
Annual Review of Economics,
Annual Reviews, vol. 1(1), pages 209-228, 05.
- Bordo, Michael D & Jeanne, Olivier, 2002.
"Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?,"
Wiley Blackwell, vol. 5(2), pages 139-164, Summer.
- Olivier D Jeanne & Michael D. Bordo, 2002. "Monetary Policy and Asset Prices; Does "Benign Neglect" Make Sense?," IMF Working Papers 02/225, International Monetary Fund.
- Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
- Andrew Hughes Hallett & Jan Libich & Petr Stehlik, 2007.
"Rogoff Revisited: The Conservative Central Banker Proposition Under Active Fiscal Policies,"
CAMA Working Papers
2007-20, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- Hughes Hallett, Andrew & Libich, Jan & Stehlík, Petr, 2009. "Rogoff revisited: The conservative central banker proposition under active fiscal policies," Economics Letters, Elsevier, vol. 104(3), pages 140-143, September.
- Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
- Vickers, John, 2000. "Monetary Policy and Asset Prices," Manchester School, University of Manchester, vol. 68(0), pages 1-22, Supplemen.
When requesting a correction, please mention this item's handle: RePEc:trb:wpaper:2009.02. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stephen Scoglio)
If references are entirely missing, you can add them using this form.