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Will macroprudential policy counteract monetary policy’s effects on financial stability?

Itai Agur () and Maria Demertzis

The North American Journal of Economics and Finance, 2019, vol. 48, issue C, 65-75

Abstract: How does monetary policy impact upon macroprudential regulation? This paper models monetary policy’s transmission to bank risk, and its interaction with a regulator’s optimization problem. The regulator uses capital regulation to affect financial stability, while taking account of the impact on financial intermediation. 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 bank risk channel of monetary policy. Thus, monetary policy affects financial stability, even in the presence of macroprudential regulation.

Keywords: Macroprudential; Leverage; Transmission; E43; E52; E61; G01; G21; G28 (search for similar items in EconPapers)
Date: 2019
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Related works:
Working Paper: Will macroprudential policy counteract monetary policy’s effects on financial stability? (2018) Downloads
Working Paper: Will Macroprudential Policy Counteract Monetary Policy’s Effects on Financial Stability? (2015) Downloads
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