Beyond monetary policy: Macroprudential responses to inflationary shocks

Diana Lima, Duarte Maia, Paul Levine, Jonathan Swarbrick and Stylianos Tsiaras

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: The recent period of rising inflationary pressures and monetary policy tightening posed new challenges for macroprudential authorities in the euro area. In a monetary union, national authorities are unable to set independent monetary policy and rely on macroprudential tools to deal with domestic financial imbalances. This paper examines how inflation and interest rate tightening originating in the broader euro area spill over to a small open economy within the union, and assesses the role of national macroprudential policy in mitigating these effects. Using a structural model with banking frictions, housing, and both borrower-based and capital-based instruments, we show that pre-emptive and countercyclical macroprudential policy can strengthen banking sector resilience and dampen the impact of external shocks. In contrast, procyclical tightening may worsen outcomes, particularly when resilience is initially low.

Date: 2026
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w202609

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