The Relation Between Monetary and Macroprudential Policy

Jong Ku Kang ()
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Jong Ku Kang: Economic Research Institute, The Bank of Korea

No 2016-8, Working Papers from Economic Research Institute, Bank of Korea

Abstract: This paper analyzes the interaction between monetary and macroprudential policies with different levels of cooperation among policy authorities: non-cooperation, full cooperation, and leader-follower relation. In non-cooperation, each policy authority's optimal response is to tighten its policy measures when the inflation gap, the output gap and the credit gap expand, and when other authorities' policy measures are loosened. This indicates that the two policies are substitutes for each other. The condition for the response functions to converge to a Nash equilibrium and the speed of convergence depend on the authorities' preferences and the economic structure. If the financial supervisory authority (FSA) puts greater importance on the output gap, the probability of non-convergence increases and the speed of convergence declines even when the condition of convergence is satisfied. When the policy authorities fully cooperate with each other, they can establish an optimal combination of policy responses to each of the three gaps.

Keywords: Monetary policy; Central banking; Financial regulation (search for similar items in EconPapers)
JEL-codes: E52 E58 G28 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2016-06-24
New Economics Papers: this item is included in nep-mac and nep-mon
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http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2016-8.pdf Working Paper, 2016 (application/pdf)

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