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National macroprudential policies in the euro area: Flexibility vs. supervision

Margarita Rubio ()

Economics Letters, 2018, vol. 170, issue C, 55-58

Abstract: In this paper, I shed some light on a much discussed topic in the policy debate: Should national macroprudential policies be supervised by a supranational entity in a monetary union? To do so, I develop a two-country DSGE monetary union model, which I calibrate to the core and periphery regions of the euro area. Monetary policy is set by the ECB, while macroprudential policies, based on the loan-to-value ratio (LTV), are set nationally. Results show that, given that the economy in the periphery is more leveraged, macroprudential policies need to be more aggressive in that region. I also find that, when LTV policies are set independently in a non-coordinated manner by each authority, albeit being beneficial for both countries and for the union as a whole, welfare gains are not as high as when they are coordinated and supervised by a separate body.

Keywords: Macroprudential policies; LTV; Monetary union; Coordination; Financial stability (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:ecolet:v:170:y:2018:i:c:p:55-58