In Search of Targeting Rules for Monetary and Macroprudential Policy
73 Pages Posted: 20 Dec 2021 Last revised: 23 Dec 2023
Date Written: December 19, 2021
Abstract
This paper examines jointly optimal monetary and macroprudential policies through the lens of numerically derived targeting rules that are optimal with policy intent transparency. Based on a standard DSGE framework that features nominal rigidity, housing, and an incomplete financial market, our targeting rules outperform an optimal Taylor-type rule-based policy framework that satisfies Tinbergen's separation principle in terms of welfare outcome, resulting in the median welfare loss that is 4.5 times smaller. The policy implications of our targeting rules are robust to alternative assumptions of policy adjustment cost or a different macroprudential policy instrument. Additionally, our targeting rules demonstrate that both monetary and macroprudential policies assign the top-most priority to inflation stabilization, which violates Tinbergen's separation principle.
Keywords: macroprudential policy, monetary policy, targeting rules, welfare
JEL Classification: E44, E58, E61
Suggested Citation: Suggested Citation