Optimal Monetary and Prudential Policies

Fabrice Collard, Harris Dellas (), Behzad Diba and Olivier Loisel

American Economic Journal: Macroeconomics, 2017, vol. 9, issue 1, 40-87

Abstract: The recent financial crisis has highlighted the interconnectedness between macroeconomic and financial stability, raising questions about how to combine monetary and prudential policies. This paper characterizes the jointly optimal monetary and prudential policies, setting the interest rate and bank-capital requirements. The source of financial fragility is the socially excessive risk taking by banks due to limited liability and deposit insurance. We provide conditions under which locally (Ramsey) optimal policy dedicates the prudential instrument to preventing inefficient risk taking by banks, and the monetary instrument to dealing with the business cycle, with the two instruments covarying either negatively, or positively and countercyclically.

JEL-codes: E32 E43 E44 E52 G01 G21 G28 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/mac.20140139
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Citations: View citations in EconPapers (105)

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Related works:
Working Paper: Optimal Monetary and Prudential Policies (2012)
Working Paper: Optimal Monetary and Prudential Policies (2012)
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