Macroprudential Policy: Its Effects and Relationship to Monetary Policy

Abstract

This paper examines the interactions of macroprudential policy and monetary policy in a New Keynesian DSGE model with financial frictions. Macroprudential policy can stabilize credit cycles. However, a macroprudential instrument that aims to stabilize a specific segment of the credit market can cause regulatory arbitrage, that is, a reallocation of credit to a less regulated part of the market. Within this model, welfare-maximizing monetary policy aims to stabilize only inflation and macroprudential policy only stabilizes credit. Two aspects of the model account for this dichotomy. First, credit stabilization is welfare improving because lower volatility is compensated by higher mean equilibrium credit and capital. Second, monetary policy is sub-optimal for credit stabilization. The reason is that it operates on the decisions of borrowers and savers, while macroprudential policy operates only on the decisions of borrowers.

Optimal Macroprudential Policy

“…This result theoretically supports the papers of Quint and Rabanal (2011), Suh (2012), and Kannan, Rabanal, and Scott (2012), claiming in numerical simulations that the policy should respond to the changes in credit, in addition to the in ‡ation rate and the output gap.…”

“…They show that social welfare improves when the policy maker's objective function includes the credit term, implying that macroprudential policies are quantitatively important. Similar approach is taken by Suh (2012) and Kannan, Rabanal, and Scott (2012) with some di¤erence in DSGE models. Suh (2012) shows that macroprudential policy should respond to credit to improve social welfare apart from monetary policy responses to the output gap and the in ‡ation rate.…”

“…Similar approach is taken by Suh (2012) and Kannan, Rabanal, and Scott (2012) with some di¤erence in DSGE models. Suh (2012) shows that macroprudential policy should respond to credit to improve social welfare apart from monetary policy responses to the output gap and the in ‡ation rate. Kannan, Rabanal, and Scott (2012) show that monetary policy reaction to credit growth can help macroeconomic stabilization.…”

Taming Macroeconomic Instability: Monetary and Macro Prudential Policy Interactions in an Agent-Based Model

“…Indeed, with respect to the Basel II scenario, the output gap and its volatility, the average unemployment, the likelihood of economic crises and the bank failure rates are significantly lower. Furthermore, the type of macro prudential regulation has limited effect on inflation (see also Suh 2012, Spencer 2014, which seems instead to be more dependent on the monetary policy rule implemented 19 (see also discussion below).…”

Os efeitos do crédito direcionado na suavização de choques financeiros e nas decisões de política monetária e macroprudencial

“…A utilização da taxa de juros de forma isolada pode não ser uma política ótima num ambiente de desequilíbrios financeiros. Resultados encontrados por Suh (2012) e Angelini, Neri e Panetta (2011), por exemplo, reforçam a ideia de que a taxa de juros por si só não é eficiente na estabilização do mercado de crédito e ainda gera efeitos indesejáveis como o aumento da volatilidade da inflação e do produto. Além disso, a alteração agressiva do instrumento de política monetária pode desbalancear outros setores da economia ou desancorar expectativas de inflação (BANK OF ENGLAND, 2009).…”