In Search of Targeting Rules for Monetary and Macroprudential Policy

73 Pages Posted: 20 Dec 2021 Last revised: 23 Dec 2023

See all articles by Tian Xia

Tian Xia

Nankai University - School of Finance

Mingzhi Xu

Peking University - Institute of New Structural Economics

Chuan He

Huazhong University of Science and Technology - School of Economics

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

Xia, Tian and Xu, Mingzhi and He, Chuan, In Search of Targeting Rules for Monetary and Macroprudential Policy (December 19, 2021). Available at SSRN: https://ssrn.com/abstract=3988988 or http://dx.doi.org/10.2139/ssrn.3988988

Tian Xia (Contact Author)

Nankai University - School of Finance ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

Mingzhi Xu

Peking University - Institute of New Structural Economics ( email )

Bejing, AK Bejing
China

Chuan He

Huazhong University of Science and Technology - School of Economics ( email )

Wuhan, Hubei 430074
China

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