Macroprudential and monetary policies: Implications for financial stability and welfare

By M. Rubio, J. Carrasco-Gallego. 2014

229 citations recorded by the source corpus.

In this paper, we analyze the implications of macroprudential and monetary policies for business cycles, welfare, and financial stability. We consider a dynamic stochastic general equilibrium (DSGE) model with housing and collateral constraints. A macroprudential rule for the loan-to-value ratio (LTV), which responds to credit growth, interacts with a traditional Taylor rule for monetary policy. We compute the optimal parameters of these rules both when monetary and macroprudential policies act in a coordinated and in a non-coordinated way. We find that both policies acting together unambiguously improves the stability of the system. In both cases, this interaction is welfare improving for the society, especially in the case of the non-coordinated game. There is though a trade-off between borrowers and savers. However, borrowers can compensate the saver’s welfare loss ala Kaldor–Hicks to achieve a Pareto-superior outcome.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/125f65ee27b1006cb5b5f118d26eafacfee81c3c

Citations in the corpus

• Macroprudential Rules and Monetary Policy when Financial Frictions Matter (2015, unknown): “…more similar to the work of Kannan et al. (2012), Angelini et al. (2012), Christensen et al. (2011), Benes and Kumhof (2011), Quint and Rabanal (2014) and Rubio and Carrasco-Gallego (2014) in that it considers the potential gains from complementing monetary policy rules with macroprudential rules.”
• CENTRAL BANK POLICIES AND INCOME AND WEALTH INEQUALITY: A SURVEY (2019, unknown): “However, as argued by Rubio and Carrasco-Gallego (2014), this macroprudential policy is welfare improving – lower LTV leads to lower household indebtedness and reduces the risk of future defaults, while borrowers benefit from financial stability.”