Optimal Monetary and Macroprudential Policy in a Currency Union

Jakob Palek () and Benjamin Schwanebeck
Additional contact information
Jakob Palek: University of Kassel

MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: The financial crisis proved strikingly that stabilizing the price level is a necessary but not a sufficient condition to ensure macroeconomic stability. The obvious candidate for addressing systemic risk is macroprudential policy. In this paper we study the optimal monetary and macroprudential policy mix in a currency union in the case of different kinds of aggregate and idiosyncratic shocks. The monetary and macroprudential instruments are modelled as independent tools. With a union-wide macroprudential tool, full absorption on the aggregate level is possible, but welfare losses due to fluctuations in relative variables prevail. With country-specific macroprudential tools, full absorption of shocks is always possible. But it is only optimal as long as there is no inefficient labor allocation. Comparing different policy regimes, we get the following ranking in terms of welfare: discretion outperforms strict inflation targeting which outperforms a (euro-area based) Taylor Rule.

Keywords: financial frictions; credit spreads; borrowing constraint; monetary policy; macroprudential policy; optimal policy mix; currency union (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2015
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Forthcoming in

Downloads: (external link)
http://www.uni-marburg.de/fb02/makro/forschung/mag ... 15/22-2015_palek.pdf First 201522 (application/pdf)

Related works:
Journal Article: Optimal monetary and macroprudential policy in a currency union (2019)
Working Paper: Optimal Monetary and Macroprudential Policy in a Currency Union (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:201522

Access Statistics for this paper

More papers in MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) Contact information at EDIRC.
Bibliographic data for series maintained by Bernd Hayo ().