Optimal Monetary and Macroprudential Policies

Josef Schroth

Staff Working Papers from Bank of Canada

Abstract: Monetary and macroprudential policy makers trade off financial stability and economic efficiency. This paper builds a model in which banks supply liquidity services through deposits and use them to fund loans and safe bond holdings. Expansive monetary policy can increase loan repayments but also provides liquidity to non-banks, which shifts deposit demand downward and lowers the liquidity premium of deposits. Optimally coordinated policies reveal two key complementarities over financial cycles. First, during normal times additional risk-weight add-ons for bonds are complementary to additional capital buffers. Second, during crisis times relative monetary policy tightening is complementary to releasing capital buffers.

Keywords: Credit and credit aggregates; Financial stability; Financial system regulation and policies; Inflation targets; Monetary policy (search for similar items in EconPapers)
JEL-codes: E60 G28 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2021-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:21-21

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