Download this Paper Open PDF in Browser

Non-Standard Monetary Policy, Asset Prices and Macroprudential Policy in a Monetary Union

70 Pages Posted: 9 Feb 2017  

Lorenzo Burlon

Bank of Italy

Andrea Gerali

Bank of Italy

Alessandro Notarpietro

Bank of Italy

Massimiliano Pisani

Bank of Italy

Date Written: October 27, 2016

Abstract

This paper evaluates the macroeconomic and financial effects of the Eurosystem’s Asset Purchase Programme (APP) and its interaction with a member country’s macroprudential policy. We assume that some households in a euro-area (EA) country are subject to a borrowing constraint, and that their local real estate acts as the collateral. In order to highlight the interaction between the APP and region-specific macroprudential policies, we simulate a situation in which, as the APP is carried out, households in one EA region develop overly optimistic expectations about local real estate prices. We report four main findings. First, a relatively large loan-to-value (LTV) ratio in one region can greatly amplify the expansionary effect of the union-wide non-standard monetary policy measures on domestic households’ borrowing. Second, while the APP is being implemented, an increase in households’ borrowing in one region can be further magnified by the combination of a high LTV ratio and overly optimistic expectations. Third, region-specific macroprudential measures can stabilize private sector borrowing with limited negative effects on economic activity. Fourth, our results hold also in the case of area-wide overly optimistic expectations.

Keywords: DSGE models, open-economy macroeconomics, non-standard monetary policy, zero lower bound, macroprudential policy

JEL Classification: E43, E52, E58

Suggested Citation

Burlon, Lorenzo and Gerali, Andrea and Notarpietro, Alessandro and Pisani, Massimiliano, Non-Standard Monetary Policy, Asset Prices and Macroprudential Policy in a Monetary Union (October 27, 2016). Bank of Italy Temi di Discussione (Working Paper) No. 1089. Available at SSRN: https://ssrn.com/abstract=2914271

Lorenzo Burlon

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Andrea Gerali

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alessandro Notarpietro

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Massimiliano Pisani (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Paper statistics

Downloads
24
Abstract Views
102