Macro-Prudential Policy and the Conduct of Monetary Policy

Abstract

The "Great Contraction" in global economic activity triggered by the financial crisis, and the extraordinary fiscal and monetary measures that public authorities had to undertake in order to put the economy back on track by putting public finances under heavy strains and leading to extremely low short-term interest rates, have shown the enormous costs resulting from an unstable financial system. Such costs have triggered wide-ranging reviews of financialstability policies. An important outcome of such a review is the strengthening of policies and instruments focused on macro-financial stability, the so-called "macro-prudential policies." The deployment of such policies may however raise important coordination issues with other stability-oriented policies, ranging from micro-prudential to monetary policies. Such coordination issues This paper benefited from the efforts of several colleagues from the Banque de France Monetary Policy Division (POMONE). We are particularly grateful to Pamfili Antipa, Julien Matheron and Eric Mengus. We are also grateful to Jean-Pierre Landau and Pierre Jaillet for comments and suggestions on earlier drafts. The views expressed in this paper are those of the authors and do not necessarily reflect the views of the Banque de France. All remaining errors are ours.

Credit, Endogenous Collateral and Risky Assets: A DSGE Model

“…By contrast, when the economy is hit by 3 Prudential policies are, for example, provided for by the Basel Accords. For an extensive and updated review on prudential policies see Beau et al (2012) and Galati and Moessner (2012). 4 There is indeed strong empirical evidence that bank leverage is strongly procyclical (Adrian and Shin, 2010b).…”

“…5 As stressed by Beau et al (2012), the reason for the close link between macro-prudential and monetary policies is that they work through the same transmission channels, such as the bank lending and the balance sheet channels.…”

Monetary Policy and Cyclical Systemic Risk - Friends or Foes?

“…This is in contrast to previous studies focussing on the effect of monetary policy on the business cycle only, and we prove that the procyclicality of monetary policy towards financial cycle is material. Second, we empirically investigate the extent of potential conflicts between achieving inflation target and stabilizing the financial cycle on the basis of the theoretical framework provided by Beau et al (2012) and find that these conflicts are not negligible, especially in the expansive phase of financial cycle. To the best of our knowledge, this investigation has been done only to a limited extent in the literature.…”

Coordinating Monetary and Macroprudential Policies

“…There is a growing literature incorporating macroprudential policy in monetary models (see references in Beau, Clerc, and Mojon (2012) and Galati and Moessner (2010)). To the extent that this literature performs a welfare analysis, it typically assumes a coordinated setup with one institution setting all available policy tools.…”