Macroprudential and Monetary Policy Interactions in a DSGE Model for Sweden
59 Pages Posted: 27 Sep 2016
Date Written: March 2016
Abstract
We analyse the effects of macroprudential and monetary policies and their interactions using an estimated dynamic stochastic general equilibrium (DSGE) model tailored to Sweden. Households face a ceiling on their loan-to-value ratio and must amortize their mortgages. The government grants mortgage interest payment deductions. Lending rates are affected by mortgage risk weights. We find that demand-side macroprudential measures are more effective in curbing household debt ratios than monetary policy, and they are less costly in terms of foregone consumption. A tighter macroprudential stance is also found to be welfare improving, by promoting lower consumption volatility in response to shocks, especially when using a combination of macroprudential instruments.
Keywords: Macroprudential Policies; Monetary Policy; Collateral Constraints
JEL Classification: E44, E52, E58, G28
Suggested Citation: Suggested Citation