Targeting Financial Stability: Macroprudential or Monetary Policy?

63 Pages Posted: 8 Jun 2018

See all articles by David Aikman

David Aikman

Bank of England - Monetary Assessment and Strategy Division

Julia Giese

Bank of England

Sujit Kapadia

European Central Bank (ECB); Bank of England

Michael McLeay

Bank of England - Monetary Assessment and Strategy Division

Multiple version iconThere are 2 versions of this paper

Date Written: June 8, 2018

Abstract

This paper explores monetary-macroprudential policy interactions in a simple, calibrated New Keynesian model incorporating the possibility of a credit boom precipitating a financial crisis and a loss function reflecting financial stability considerations. Deploying the countercyclical capital buffer (CCyB) improves outcomes significantly relative to when interest rates are the only instrument. The instruments are typically substitutes, with monetary policy loosening when the CCyB tightens. We also examine when the instruments are complements and assess how different shocks, the effective lower bound for monetary policy, market-based finance and a risk-taking channel of monetary policy affect our results.

Keywords: Macroprudential, monetary policy, financial stability, capital buffer, financial crises, credit boom

JEL Classification: E52, E58, G01, G28

Suggested Citation

Aikman, David and Giese, Julia and Kapadia, Sujit and McLeay, Michael, Targeting Financial Stability: Macroprudential or Monetary Policy? (June 8, 2018). Bank of England Working Paper No. 734. Available at SSRN: https://ssrn.com/abstract=3192966 or http://dx.doi.org/10.2139/ssrn.3192966

David Aikman (Contact Author)

Bank of England - Monetary Assessment and Strategy Division ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Julia Giese

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Sujit Kapadia

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom
020-7601-5507 (Phone)

Michael McLeay

Bank of England - Monetary Assessment and Strategy Division ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
33
Abstract Views
310
PlumX Metrics