Monetary Policy, Macroprudential Policy, and Financial Stability

Rafael Repullo and David Martinez-Miera

No 13530, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper reexamines from a theoretical perspective the role of monetary and macroprudential policies in addressing the build-up of risks in the financial system. We construct a stylized general equilibrium model in which the key friction comes from a moral hazard problem in firms' financing that banks' equity capital serves to ameliorate. Tight monetary policy is introduced by open market sales of government debt, and tight macroprudential policy by an increase in capital requirements. We show that both policies are useful, but macroprudential policy is more effective in terms of financial stability and leads to higher social welfare.

Keywords: Bank monitoring; Intermediation margin; Monetary policy; Macroprudential policy; Capital requirements; Financial stability (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 G28 (search for similar items in EconPapers)
Date: 2019-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Monetary Policy, Macroprudential Policy, and Financial Stability (2019)
Working Paper: Monetary Policy, Macroprudential Policy, and Financial Stability (2019)
Working Paper: Monetary policy, macroprudential policy, and financial stability (2019)
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