Coordinating macroprudential policies within the Euro area: The case of Spain

Abstract

In the aftermath of the global …nancial crisis, there is consensus on the need for macroprudential policies to promote …nancial stability. However, the optimal way to implement such policies in the Euro area is a question open to debate, given that countries have to coordinate. In this paper, we propose a two-country, two-sector monetary union dynamic stochastic general equilibrium model (DSGE) with housing to analyze the optimal implementation of macroprudential policies in the Euro area. Currently, Spain is the only country within the EU that has not established a macroprudential regulator. We use Spain as a natural experiment to study the e¤ects of a lack of coordination in the use of macroprudential policies in the European Monetary Union (EMU). We focus on a particular macroprudential policy, a rule regarding the loan-to-value ratio, which responds countercyclically to credit booms. We …nd that such a policy is welfare enhancing for the Euro area. Nevertheless, if one country does not implement the policy, but the rest of the EMU does, as in the current situation with Spain, this country still yields some bene…ts as a result of its partners'implementation of the policy because it gains from a more stable …nancial system without incurring any output costs. However, if all Euro countries actively implement the policy, the welfare gains for all of them are larger.

Assessing the Gains from International Macroprudential Policy Cooperation

“…9. See, for example, Rubio (2014), Quint and Rabanal (2014), Mendicino and Punzi (2014), Brzoza-Brzezina Michałand Kolasa and Makarski (2015), Palek and Schwanebeck (2015), Agénor et al (2018b), and Rubio and Carrasco-Gallego (2016).…”

“…Some of these contributions have also looked at the combination of monetary policy and MaP regulation (see Mendicino andPunzi 2014, Quint andRabanal 2014). 11. For example, loan-to-value (LTV) ratios (Rubio 2014, Brzoza-Brzezina Michałand Kolasa and Makarski 2015, Rubio and Carrasco-Gallego 2016, capital requirements (Kollmann et al 2011, Kollmann 2013, and reserve requirements (Agénor et al 2018b).…”

Macroprudential policy coordination in a currency union

“…Her results emphasized the importance of asymmetries for the conduct of macroprudential policies in a monetary union, especially when heterogeneity results in differences in aggregate volatility. In the same vein, Rubio and Carrasco-Gallego (2016) found that, compared to the case where an LTV macroprudential policy is implemented at the level of a single member country, the welfare gain is larger if all members of the union (or a common supranational entity) implement it in coordinated fashion. At the same time, the additional welfare gain from introducing country-specific macroprudential is Teranishi (2017) for specific contributions, as well as Taylor (2013), Eichengreen (2014) and Engel (2016) for a broader perspective.…”

“…See Pappa (2004), Benigno and Benigno (2008), Liu and Pappa (2008), Coenen et al (2009), Kolasa and Lombardo (2014), Banerjee et al (2016), and Fujiwara and cluding those of Bengui (2014), Jeanne (2014), Korinek (2014Korinek ( , 2017, and Kara (2016), are based on small analytical models. A growing number of others are based on twocountry dynamic stochastic general equilibrium (DSGE) models with financial market imperfections and include Kollmann et al (2011), Kollmann (2013), Rubio (2014), Cuadra and Nuguer (2014), Quint and Rabanal (2014), Mendicino and Punzi (2014), Brzoza-Brzezina et al (2015), Palek and Schwanebeck (2015), Poutineau and Vermandel (2015), and Rubio and Carrasco-Gallego (2016). 3 Of particular interest to us in this study are those contributions focusing on a currency union with national policymakers and a common central bank, both of which possibly taking on a macroprudential regulatory role as an additional mandate.…”

Out of Sync Subnational Housing Markets and Macroprudential Policies in the UK

“…Despite a different research question, the DSGE model employed in this paper is related to the recent open economy DSGE literature analysing monetary policy in heterogeous monetary unions. See, for example,Brzoza-Brzezina et al (2015),Rubio and Carrasco-Gallego (2016) andRubio (2018).…”