On the Limits of Macroprudential Policy

Marcin Kolasa

The B.E. Journal of Macroeconomics, 2021, vol. 21, issue 1, 281-307

Abstract: This paper studies how macroprudential policy tools applied to the housing market can complement the interest rate-based monetary policy in achieving one additional stabilization objective, defined as keeping either economic activity or credit at some exogenous (and possibly time-varying) levels. We show analytically in a canonical New Keynesian model with housing and collateral constraints that using the loan-to-value (LTV) ratio, tax on credit or tax on property as additional policy instruments does not resolve the inflation-output volatility tradeoff. Perfect targeting of inflation and credit with monetary and macroprudential policy is possible only if the role of housing debt in the economy is sufficiently small. The identified limits to the considered policies are related to their predominantly intertemporal impact on decisions made by financially constrained agents, making them poor complements to monetary policy, which also operates at an intertemporal margin. These limits can be overcome if macroprudential policy is instead designed such that it sufficiently redistributes income between savers and borrowers.

Keywords: macroprudential policy; monetary policy; targeting tradeoffs (search for similar items in EconPapers)
JEL-codes: E32 E58 E63 G21 G28 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: On the limits of macroprudential policy (2016)
Working Paper: On the limits of macroprudential policy (2016)
Working Paper: On the Limits of Macroprudential Policy (2015)
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DOI: 10.1515/bejm-2018-0189

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