Year: 2012
Type: report
Abstract: This paper examines the interactions of macroprudential policy and monetary policy in a New Keynesian DSGE model with financial frictions.Macroprudential policy can stabilize credit cycles.However, a macroprudential instrument that aims to stabilize a specific segment of the credit market can cause regulatory arbitrage, that is, a reallocation of credit to a less regulated part of the market.Within this model, welfare-maximizing monetary policy aims to stabilize only inflation and macroprudential policy only stabilizes credit.Two aspects of the model account for this dichotomy.First, credit stabilization is welfare improving because lower volatility is compensated by higher mean equilibrium credit and capital.Second, monetary policy is sub-optimal for credit stabilization.The reason is that it operates on the decisions of borrowers and savers, while macroprudential policy operates only on the decisions of borrowers.
Source: Working paper
Author: Hyunduk Suh
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W2139088509