Optimal Simple Rule for Monetary Policy and Macroprudential Policy in a Financial Accelerator Model

Hyunduk Suh

No 2017-9, Inha University IBER Working Paper Series from Inha University, Institute of Business and Economic Research

Abstract: This paper examines an optimal simple rule for monetary policy and macroprudential policy in a New Keynesian DSGE model with a Bernanke et al. (1999) financial accelerator mechanism. Macroprudential policy is given by countercyclical bank capital regulation or loan-to-value (LTV) ratio regulation. Macroprudential policy can mitigate the inefficiencies arising from financial friction, by reducing the uncertainty related with the solvency risk. It is optimal to separate monetary policy from macroprudential concern and use only macroprudential policy for credit stabilization. Using monetary policy for credit stabilization is sub-optimal because of its tradeoff with inflation stability.

Keywords: Macroprudential policy; monetary policy; countercyclical bank capital regulation; loan-to-value (LTV) ratio regulation; optimal simple rule (search for similar items in EconPapers)
JEL-codes: E44 E52 E59 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2017-08, Revised 2017-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:inh:wpaper:2017-9

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