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Institutional mandates for macroeconomic and financial stability

Pierre-Richard Agénor and Alessandro Flamini ()

Journal of Financial Stability, 2022, vol. 62, issue C

Abstract: The performance of alternative institutional mandates in achieving macroeconomic and financial stability is studied in a model with financial frictions and reserve requirements as the main instrument of macroprudential regulation. The analysis shows that under a policy loss evaluation approach, coordination leads to a substantial gain in stability in response to various shocks, with the policy interest rate and the required reserve ratio exhibiting a high degree of complementarity. The latter is also more efficient than the former in promoting financial stability. In addition, it is optimal to delegate the financial stability goal also to the monetary authority when the financial regulator only operates a credit-based reserve requirements rule. These results hold under a utility-based welfare evaluation approach as well, as long as the central bank’s institutional mandate focuses mainly on macroeconomic stability. Thus, when the mandate bestowed to policymakers by society accounts for financial stability, evaluating the performance of policy regimes based solely on a welfare criterion could be inappropriate.

Keywords: Macroeconomic stability; Financial stability; Reserve requirement ratio; Macroprudential regulation; Coordination between the monetary authority and the financial regulator (search for similar items in EconPapers)
JEL-codes: E31 E44 E52 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Institutional Mandates for Macroeconomic and Financial Stability (2016) Downloads
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DOI: 10.1016/j.jfs.2022.101063

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