Targeting Financial Stability: Macroprudential or Monetary Policy?

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: Suggested Citation

Aikman, David and Giese, Julia and Kapadia, Sujit 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