A Prudential trade-off? Leakages and Interactions with Monetary Policy

Baptiste Meunier and Pedrono Justine

Working papers from Banque de France

Abstract: While monetary and prudential policies are generally analysed separately, this paper focuses on how the two interact. Taking an international perspective, we show that monetary policy in a centre economy (Euro Area) spill over its borders through bank lending therefore inducing volatility in cross-border lending flows. Investigating a sample of 30 advanced and emerging economies, we find evidence that prudential policy in the receiving-country interact with monetary policy so that a tighter prudential stance in the recipient-country mitigates the volatility of banking flows induced by monetary policy abroad. But we also show that a tighter prudential stance interactions apart implies a higher growThéof cross-border lending. Taken together, these results might suggest a trade-off: while a tighter prudential stance reduces the volatility of cross-border lending flows, it also implies that local borrowers resort more to lending from abroad. Taking advantage of the granularity of our confidential dataset, we finally explore heterogeneities and show that such leakages arise only for financially more open economies and only through the financial sector, with evidence that such leakages are driven by intra-group lending.ion-JEL: O31, L11, L51, J8, L25

Keywords: Monetary Policy; Prudential Policy; Policy Interactions; Spillovers; Prudential Leakages; Internation Banking. (search for similar items in EconPapers)
JEL-codes: E52 F34 F36 F42 G18 G21 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2021
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
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