Monetary policy and macroprudential policy: Rivals or teammates?

Abstract

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Monetary Policy and Cyclical Systemic Risk - Friends or Foes?

“…Conversely, others provide evidence that monetary policies that systematically include financial factors support the dampening of the financial cycle, thus improving output in the long run . Our results support the views of Malovaná and Frait (2016) that monetary tightening coincides with lower credit-to-GDP and that accommodative monetary policy may contribute to a build-up of financial vulnerabilities.…”

“…We assess the behaviour of monetary policies towards cyclical systemic risk according to a dynamic approach (changes in the credit-to-GDP gap level). We follow the research approach of Malovaná and Frait (2016) who used the credit-to-GDP to analyse causality between monetary and macroprudential polices in a time-varying coefficient panel VAR model. A similar approach was also taken by Claessens et al (2011), who developed the measure of cycle synchronisation based on the gap change.…”

Systemic Risk in Post-Crisis Financial Markets

“…It is because the mix depends on the properties of two cycles, the financial cycle and business cycle. And because these cycles are rather different, sometimes is very difficult to tell what is the best approach or least problematic approach (Malovaná and Frait, 2017). The typical situation of this sort is right now in Europe.…”

“…Macroprudential policy instruments lower the financial system's vulnerability and increase its resilience by establishing capital and liquidity cushions, which prevent procyclicality in the financial system. Malovaná and Frait (2017) Colletaz et al (2018) find that causality from monetary policy to systemic risk in the long run in the Eurozone. As a result, they claim that central banks must be aware that a too loose monetary policy stance may be conducive to a build-up of systemic risk.…”

Unpleasant Monetarist Arithmetic: Macroprudential Edition

“…Melecky and Podpiera’s () analysis suggests that microprudential policy should be conducted – jointly with macroprudential and monetary policy – by the central bank rather than a separate prudential authority. Similarly, Malovana and Frait’s () analysis of six EU countries implies that ‘coordination of the two policies is necessary to avoid an undesirable policy mix preventing effective achievement of the main objectives in the two policy areas’. Perhaps most forcefully, our main message is backed up by the evidence of Lim et al () using a sample of 39 countries.…”