Monetary and macroprudential policy interactions in a model of the euro area

Richard Dennis and Pelin Ilbas

Journal of Economic Dynamics and Control, 2023, vol. 154, issue C

Abstract: We use the two-country euro area model developed by Quint and Rabanal (2014) to study policymaking in a monetary union. We focus on: 1) a two-policymaker setting where there is strategic interaction between a single monetary authority and an EMU-level macro-prudential authority, and; 2) a three-policymaker setting where there is strategic interaction between a single monetary authority and two regional-level macroprudential authorities. In the former, price stability and financial stability are pursued at the area-wide level, while in the latter each macro-prudential authority adopts region-specific objectives. We compare cooperative and non-cooperative equilibria in simultaneous-move and leadership environments, each obtained assuming discretionary policymaking. In the two-policymaker setting, we find that the gains from either the monetary authority or the macroprudential regulator having a first-mover, or leadership, advantage are somewhat limited, and the most favorable outcome is achieved under cooperation where both policies are formulated and conducted simultaneously. In the three-policymaker setting, we find that delegating macroprudential policy to regional macroprudential regulators plays an important role in achieving regional stability.

Keywords: Monetary policy; Macro-prudential policy; Policy coordination (search for similar items in EconPapers)
JEL-codes: E42 E44 E52 E58 E61 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:154:y:2023:i:c:s0165188923001124

DOI: 10.1016/j.jedc.2023.104706

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