Will Macroprudential Policy Counteract Monetary Policy's Effects on Financial Stability?

24 Pages Posted: 28 Mar 2016

Date Written: December 2015

Abstract

How does monetary policy impact upon macroprudential regulation? This paper models monetary policy's transmission to bank risk taking, and its interaction with a regulator's optimization problem. The regulator uses its macroprudential tool, a leverage ratio, to maintain financial stability, while taking account of the impact on credit provision. A change in the monetary policy rate tilts the regulator's entire trade-off. We show that the regulator allows interest rate changes to partly "pass through" to bank soundness by not neutralizing the risk-taking channel of monetary policy. Thus, monetary policy affects financial stability, even in the presence of macroprudential regulation.

Keywords: Macroprudential, Supervision, Transmission, bank, risk, banks, financial stability, interest, Monetary Policy (Targets, Instruments, and Effects), Government Policy and Regulation, All Countries, Leverage,

JEL Classification: E43, E52, E61, G01, G21, G28

Suggested Citation

Agur, Itai and Demertzis, Maria, Will Macroprudential Policy Counteract Monetary Policy's Effects on Financial Stability? (December 2015). IMF Working Paper No. 15/283. Available at SSRN: https://ssrn.com/abstract=2754913

Itai Agur (Contact Author)

IMF ( email )

700 19th Street NW
Washington, DC 20431
United States

HOME PAGE: http://itaiagur.weebly.com/

Maria Demertzis

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

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