Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. In a New Keynesian model with the BGG accelerator and risk shocks, we show that violations of Tinbergen's Rule and strategic interaction between economic authorities undermine the effectiveness of monetary and financial policies. Separate monetary and financial policy rules produce higher welfare than a monetary rule augmented with credit spreads. The latter yields a tight money-tight credit regime in which the interest rate responds too much to inflation and not enough to credit. Reaction curves for the policy-rule elasticities are nonlinear, which reflects shifts in these elasticities from strategic substitutes to complements. The Nash equilibrium is inferior to the Cooperative equilibrium, both are inferior to a first-best outcome, and both might produce tight money-tight credit regimes. Keywords: Financial Frictions, Monetary Policy, Financial Policy. JEL Classification: E44; E52; E58. Terms of use: Documents inResumen: En un modelo Nuevo Keynesiano con el acelerador de BGG y choques de riesgo, mostramos que violaciones de la Regla de Tinbergen y la interacción estratégica entre autoridades económicas disminuyen la efectividad de las políticas monetaria y financiera. Reglas separadas de política monetaria y financiera producen un bienestar mayor que una regla monetaria aumentada con spread crediticios. Esta última arroja un régimen con restricciones monetarias y crediticias, en el cual la tasa de interés responde demasiado a la inflación y no lo suficiente al crédito. Las curvas de reacción de las elasticidades de las reglas de política son no lineales, lo cual refleja cambios en estas elasticidades de substitutos estratégicos a complementos. El equilibrio de Nash es inferior al equilibrio Cooperativo, ambos son inferiores al mejor diseño de política, y ambos pueden producir regímenes monetarios y crediticios restrictivos.

Bank capital in the short and in the long run

“…Our work is connected to the literature on the interaction between monetary and macroprudential policy in stabilizing fluctuations (e.g. De Paoli and Paustian, 2013; Kiley and Sim, 2017;Lambertini et al 2013;Leduc and Natal, 2016;Collard et al, 2017;Carrillo et al 2017;Gersbach el al., 2018;Ferrero et al, 2018;Van der Ghote, 2018). Differently from these studies, we focus on the interaction of policies during the transition to higher capital requirements in a framework where the capital requirements reduce bank default.…”

Unpleasant Monetarist Arithmetic: Macroprudential Edition

“…The combinations of H with N or S yield the fourth best through to the seventh best outcomes for society. The mixed‐strategy Nash equilibria as well as the macro model’s outcome generally fall into this category as well; see Carrillo et al ().…”

“…These capture the fact that M&Ms are partial (but not perfect) substitutes in stabilising financial shocks. Due to such generality, the nature of our game‐theoretic results applies broadly to all existing microfounded models of M&Ms. To provide more macro intuition we also put forward a simple three‐equation model, essentially a reduced form of Carrillo et al (). But it should be stressed that this specific model is an illustrative example only; none of our strategic findings are dependent on it.…”

Policy Conflicts and Inflation Targeting: The Role of Credit Markets

“…where Xi,t is a credit variable to allow for leaning against credit-driven asset bubbles (e.g., Carrillo et al, 2017;and Allen et al, 2017). 6 The credit variable's interactive terms are associated with two dummies of inflation status, which represent times when an IT central bank is conservatively expected to be constrained by the price stability goal.…”

“…Recent research using DSGE models with financial frictions have examined how the collaboration of monetary policy and macroprudential policy affects macroeconomic stabilization or welfare: for example, if macroprudential policy is deployed to shore up collateral liquidity or require liquidity buffers in response to financial shocks (Choi and Cook, 2012); if monetary and capital requirements policies collaborate (Angelini et al, 2014); if macroprudential policy responds to financial imbalance (Bailliu et al, 2015); or if monetary policy interacts with macroprudential policy (Mendoza, 2016;and Carrillo et al, 2017).…”