Optimal Macroprudential Policy

Junichi Fujimoto, Ko Munakata, Koji Nakamura and Yuki Teranishi
Additional contact information
Ko Munakata: Bank of Japan
Koji Nakamura: Bank of Japan

No 30, UTokyo Price Project Working Paper Series from University of Tokyo, Graduate School of Economics

Abstract: This paper introduces financial market frictions into a standard New Keynesian model through search and matching in the credit market. Under such financial mar- ket frictions, a second-order approximation of social welfare includes a term involv- ing credit, in addition to terms for inflation and consumption. As a consequence, the optimal monetary and macroprudential policies must contribute to both finan- cial and price stability. This result holds for various approximated welfares that can change corresponding to macroprudential policy variables. The key features of opti- mal policies are as follows. The optimal monetary policy requires keeping the credit market countercyclical against the real economy. Commitment in monetary and macro- prudential policy, rather than approximated welfare, justifies history dependence and pre-emptiveness. Appropriate combinations of macroprudential and monetary policy achieve perfect financial and price stability.

Keywords: optimal macroprudential policy; optimal monetary policy; financial market friction (search for similar items in EconPapers)
JEL-codes: E44 E52 E61 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2014-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Related works:
Working Paper: Optimal Macroprudential Policy (2013)
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