Macro-Prudential Policy and the Conduct of Monetary Policy
Banque de France
Banque de France
affiliation not provided to SSRN
July 1, 2012
Banque de France Working Paper No. 390
In this paper, we analyze the interactions between monetary and macro-prudential policies and the circumstances under which such interactions call for their coordinated implementation. We start with a review of the interdependencies between monetary and macro-prudential policies. Then, we use a DSGE model incorporating financial frictions, heterogeneous agents and housing, which is estimated for the euro area over the period 1985-2010, to identify the circumstances under which monetary and macro-prudential policies may have compounding, neutral or conflicting impacts on price stability. We compare inflation dynamics across four 'policy regimes' depending on: the monetary policy objectives – that is, whether the policy instrument, the short-term interest rate factors in financial stability considerations by leaning against credit growth; and the existence, or not, of an authority in charge of a financial stability objective through the implementation of macro-prudential policies that can 'lean against credit' without affecting the short-term interest rate.
Our main result is that under most circumstances, macro-prudential policies have either a limited or a stabilizing effect on inflation.
Number of Pages in PDF File: 34
Keywords: monetary policy, financial stability, macro-prudential policy, ESRB
JEL Classification: E51, E58, E37, G13, G18working papers series
Date posted: August 20, 2012
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