Coordinating Monetary and Macroprudential Policies

50 Pages Posted: 16 Nov 2013

See all articles by Bianca De Paoli

Bianca De Paoli

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Matthias Paustian

Bank of England

Date Written: November 1, 2013

Abstract

The financial crisis has prompted macroeconomists to think of new policy instruments that could help ensure financial stability. Policymakers are interested in understanding how these should be set in conjunction with monetary policy. We contribute to this debate by analyzing how monetary and macroprudential policy should be conducted to reduce the costs of macroeconomic fluctuations. We do so in a model in which such costs are driven by nominal rigidities and credit constraints. We find that, if faced with cost-push shocks, policy authorities should cooperate and commit to a given course of action. In a world in which monetary and macroprudential tools are set independently and under discretion, our findings suggest that assigning conservative mandates (รก la Rogoff [1985]) and having one of the authorities act as a leader can mitigate coordination problems. At the same time, choosing monetary and macroprudential tools that work in a similar fashion can increase such problems.

Keywords: monetary policy, macroprudential policy, commitment, discretion, policy coordination, borrowing constraints

JEL Classification: E32, C32

Suggested Citation

De Paoli, Bianca and Paustian, Matthias, Coordinating Monetary and Macroprudential Policies (November 1, 2013). FRB of New York Staff Report No. 653, Available at SSRN: https://ssrn.com/abstract=2355154 or http://dx.doi.org/10.2139/ssrn.2355154

Bianca De Paoli (Contact Author)

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Matthias Paustian

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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