Will Macroprudential Policy Counteract Monetary Policy’s Effects on Financial Stability?

Itai Agur and Maria Demertzis

No 2015/283, IMF Working Papers from International Monetary Fund

Abstract: How does monetary policy impact upon macroprudential regulation? This paper models monetary policy's transmission to bank risk taking, and its interaction with a regulator's optimization problem. The regulator uses its macroprudential tool, a leverage ratio, to maintain financial stability, while taking account of the impact on credit provision. A change in the monetary policy rate tilts the regulator's entire trade-off. We show that the regulator allows interest rate changes to partly "pass through" to bank soundness by not neutralizing the risk-taking channel of monetary policy. Thus, monetary policy affects financial stability, even in the presence of macroprudential regulation.

Keywords: WP; Macroprudential; Supervision; Transmission; bank risk; risk profile; bank regulator; bank leverage; monetary policy rate change; risk choice; Financial sector stability; Central bank policy rate; Macroprudential policy; Bank soundness; Global (search for similar items in EconPapers)
Pages: 23
Date: 2015-12-29
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Will macroprudential policy counteract monetary policy’s effects on financial stability? (2019)
Working Paper: Will macroprudential policy counteract monetary policy’s effects on financial stability? (2018)
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