Optimal Macroprudential Policy

Abstract

We introduce …nancial market friction through search and matching in the loan market into a standard New Keynesian model. We reveal that the second order approximation of social welfare includes the terms related to credit, such as credit market tightness, the volume of credit, and the loan separation rate, in addition to the in ‡ation rate and consumption under …nancial market friction. Our analytical result justi…es why optimal policy should take credit variation into account. We introduce monetary policy and macroprudential policy measures for …nancial stability into the model. The optimal outcome is achieved through monetary and macroprudential policies by taking into account not only price stability but also …nancial stability.