Monetary Policy, Macroprudential Policy, and Financial Stability

42 Pages Posted: 26 Jul 2019

See all articles by David Martinez-Miera

David Martinez-Miera

Universidad Carlos III de Madrid - Department of Business Administration; Center for Economic Policy Research

Rafael Repullo

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: July, 2019

Abstract

This paper reexamines from a theoretical perspective the role of monetary and macroprudential policies in addressing the build-up of risks in the financial system. We construct a stylized general equilibrium model in which the key friction comes from a moral hazard problem in firms financing that banks’ equity capital serves to ameliorate. Tight monetary policy is introduced by open market sales of government debt, and tight macroprudential policy by an increase in capital requirements. We show that both policies are useful, but macroprudential policy is more effective in fostering financial stability and leads to higher social welfare.

Keywords: bank monitoring, capital requirements, financial stability, intermediation margin, macroprudential policy, monetary policy

JEL Classification: G21, G28, E44, E52

Suggested Citation

Martinez-Miera, David and Repullo, Rafael, Monetary Policy, Macroprudential Policy, and Financial Stability (July, 2019). ECB Working Paper No. 2297. Available at SSRN: https://ssrn.com/abstract=3427096

David Martinez-Miera (Contact Author)

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Center for Economic Policy Research ( email )

London
United Kingdom

Rafael Repullo

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91429 0551 (Phone)
+34 91429 1056 (Fax)

HOME PAGE: http://www.cemfi.es/~repullo/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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