Macroprudential Policy Measures: Macroeconomic Impact and Interaction with Monetary Policy

65 Pages Posted: 21 Feb 2020

See all articles by Guido Cozzi

Guido Cozzi

European Central Bank (ECB)

Matthieu Darracq Paries

European Central Bank (ECB)

Peter Karadi

European Central Bank (ECB)

Jenny Körner

European Central Bank (ECB)

Christoffer Kok

European Central Bank (ECB)

Falk Mazelis

European Central Bank (ECB)

Kalin Nikolov

European Central Bank (ECB)

Elena Rancoita

European Central Bank (ECB)

Alejandro Van der Ghote

European Central Bank (ECB) - Directorate General Research

Julien Weber

University of Chicago - Booth School of Business

Date Written: February, 2020

Abstract

This paper examines the interactions of macroprudential and monetary policies. We find, using a range of macroeconomic models used at the European Central Bank, that in the long run, a 1% bank capital requirement increase has a small impact on GDP. In the short run, GDP declines by 0.15-0.35%. Under a stronger monetary policy reaction, the impact falls to 0.05-0.25%. The paper also examines how capital requirements and the conduct of macroprudential policy affect the monetary transmission mechanism. Higher bank leverage increases the economy's vulnerability to shocks but also monetary policy's ability to offset them. Macroprudential policy diminishes the frequency and severity of financial crises thus eliminating the need for extremely low interest rates. Counter-cyclical capital measures reduce the neutral real interest rate in normal times.

Keywords: bank stability, credit, monetary policy

JEL Classification: E4, E43, E5, E52, G20, G21

Suggested Citation

Cozzi, Guido and Darracq Paries, Matthieu and Karadi, Peter and Körner, Jenny and Kok, Christoffer and Mazelis, Falk and Nikolov, Kalin and Rancoita, Elena and Van der Ghote, Alejandro and Weber, Julien, Macroprudential Policy Measures: Macroeconomic Impact and Interaction with Monetary Policy (February, 2020). ECB Working Paper No. 2376. Available at SSRN: https://ssrn.com/abstract=3541732

Guido Cozzi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Matthieu Darracq Paries (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+496913446631 (Phone)
+496913447604 (Fax)

Peter Karadi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jenny Körner

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Christoffer Kok

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Falk Mazelis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Kalin Nikolov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Elena Rancoita

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Alejandro Van der Ghote

European Central Bank (ECB) - Directorate General Research ( email )

Sonnemannstrasse 20
Frankfurt am Main, Hesse D-60314
Germany

HOME PAGE: http://https://sites.google.com/view/avanderghote/home

Julien Weber

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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