Monetary Policy, Macroprudential Policy and Financial Stability

50 Pages Posted: 25 Feb 2022

See all articles by Luc Laeven

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Angela Maddaloni

European Central Bank (ECB)

Caterina Mendicino

European Central Bank (ECB) - Directorate General Research

Date Written: February, 2022

Abstract

Recent research developed under the ECB research task force on Monetary Policy, Macroprudential Policy and Financial Stability highlights the existence of trade-offs and spillovers that monetary policy and macroprudential authorities face when deciding on their policy interventions. Monetary policy measures are key to support the supply of credit to the economy, but they could also have unintended consequences on financial stability risks. Macroprudential policies are instead effective in limiting financial stability risks, but they could also reduce the length of economic expansions by preventing credit from flowing to productive economic activities. In addition, since monetary and macroprudential policies transmit to the broad economy via the financial system, they unavoidably affect each other’s effectiveness. Taking these factors into account is key for the design and implementation of both policies.

Keywords: financial frictions, policy trade-offs, risk taking, systemic risk

JEL Classification: E3, E44, G01, G21

Suggested Citation

Laeven, Luc A. and Maddaloni, Angela and Mendicino, Caterina, Monetary Policy, Macroprudential Policy and Financial Stability (February, 2022). ECB Working Paper No. 2022/2647, Available at SSRN: https://ssrn.com/abstract=4043288 or http://dx.doi.org/10.2139/ssrn.4043288

Luc A. Laeven (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Angela Maddaloni

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Caterina Mendicino

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

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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