Policy mandates for macro-prudential and monetary policies in a new Keynesian framework

Arbeitspapier

In the aftermath of the financial crisis, the role of monetary policy and macro-prudential regulation in promoting financial stability is under discussion. The old debate concerning whether monetary policy should respond to credit and asset price bubbles was revived, whereas macro-prudential regulation is being assessed as an alternative macroeconomic tool to deal with financial imbalances. The paper explores both sides of the debate in a New Keynesian framework with financial frictions by comparing the welfare and stabilisation impacts of distinct policy regimes. First, we investigate whether there is a welfare benefit from monetary policy leaning against financial instability. We show that monetary policy rules of this type perform better than conventional monetary rules. Second, by introducing macro-prudential regulation in the model, results from optimal policy analysis suggest also that there are welfare gains, even in the case in which monetary and macro-prudential authorities are independent and react to their own policy goal.

Object Details

• ISBN: 978-92-899-1597-7
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1784

Classification and Topics

• Classification: Wirtschaft ; Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) ; Monetary Policy, Central Banking, and the Supply of Money and Credit: General ; Financial Institutions and Services: Government Policy and Regulation
• Subject: DSGE ; Financial frictions ; macro-prudential policy ; monetary policy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Levine, Paul ; Lima, Diana
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/154217
• Last update: 10.03.2025, 11:43 AM CET