Macroprudential policy and imbalances in the euro area

Michal Brzoza-Brzezina, Marcin Kolasa and Krzysztof Makarski

Journal of International Money and Finance, 2015, vol. 51, issue C, 137-154

Abstract: Since its creation the euro area suffered from imbalances between its core and peripheral members. This paper checks whether macroprudential policy applied to the peripheral countries could contribute to providing more macroeconomic stability in this region. To this end we build a two-economy macrofinancial model and simulate the effects of macroprudential policy (regulating the loan-to-value ratio) when the core and the periphery are exposed to asymmetric shocks. We find that macroprudential policy is able to substantially lower the amplitude of credit and output fluctuations in the periphery. However, for the policy to be effective, it should be decentralized. Very similar conclusions hold when welfare is considered as the optimality criterion.

Keywords: Euro-area imbalances; Macroprudential policy; DSGE models; Financial frictions (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (92)

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Working Paper: Macroprudential policy and imbalances in the euro area (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:51:y:2015:i:c:p:137-154

DOI: 10.1016/j.jimonfin.2014.10.004

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