Interactions and Coordination between Monetary and Macroprudential Policies

Abstract

I study monetary and macroprudential policy intervention in a general equilibrium economy with recurrent boom-bust cycles. forward-looking variables to also react to policy intervention during phases in which the intervention is inactive. Macroprudential policies that contain systemic risk in financial markets during booms, therefore, relax market-based funding constraints during busts, which helps mitigate the severity and shorten the duration of economic meltdowns. Contractionary monetary interventions during booms also have (latent) beneficial effects during busts. Coordination between the two policy instruments improves social welfare over standard, Recurrence causes noncoordinated policy interventions, but improvement is moderate. (JEL E32, E44, E52, E61)

On the Interaction between Monetary and Macroprudential Policies

“…Threshold state 𝜂𝜂̅ ∈ (0,1) is such that above the threshold, the incentivecompatible limit exceeds the efficient quantity, and below the threshold, the opposite happens. Source: Van der Ghote (2020a).…”

“…Figure 4 provides a more thorough illustration of the effects of optimal macroprudential policy in the framework of Van der Ghote (2020a). The figure contrasts the equilibrium outcome under the optimal policy with that under laissez faire.…”

“…ECB Working Paper Series No 2527 / February 2021 To illustrate how presence of non-bank financial intermediaries or "shadow banks" can limit the effects of macroprudential policy, we use a modified version of Van der Ghote (2020a). Relative to the baseline model, the novel assumption is that macroprudential policy affects only a subset of banks, while the rest are assumed to be shadow banks that lie outside the reach of regulation.…”

Benefits of Macro-Prudential Policy in Low Interest Rate Environments

“…The baseline model builds on work by Gertler and Kiyotaki (2010); Gertler and Karadi (2011); Brunnermeier and Sannikov (2014); ; and Van der Ghote (2020). The focus in this model is on the relationship between systemic risk and the natural rate.…”

“…To formalize these ideas and findings, I use a general equilibrium model of financial inter-ECB Working Paper Series No 2498 / December 2020 mediation with endogenous systemic risk in financial markets and endogenous risk in aggregate consumption. The model builds on the work of Brunnermeier and Sannikov (2014); Caballero and Simsek (2020); and Van der Ghote (2020). In the model, the aggregate net worth of financial intermediaries as a share of total wealth suffices to summarize the phase of the cycle.…”