Optimal monetary and macroprudential policy in a currency union

Jakob Palek and Benjamin Schwanebeck

Journal of International Money and Finance, 2019, vol. 93, issue C, 167-186

Abstract: The financial crisis proved strikingly that financial frictions play a crucial role for system risk and policymakers have overlooked financial stability. The obvious candidate for addressing financial stability is macroprudential policy. In this paper we study the optimal (Ramsey) monetary and macroprudential policy mix in a currency union in the case of different kinds of aggregate and idiosyncratic shocks. The monetary and macroprudential instruments are modeled as independent tools. With a union-wide macroprudential tool, full stabilization on the aggregate level is possible, but welfare losses due to fluctuations in relative variables prevail. With country-specific macroprudential tools, full stabilization of shocks is always possible but, as a rule, not optimal. Evaluating the performance of different policy regimes shows that the additional welfare gains from having country-specific macroprudential tools are small and vanish as the ability of the central bank to commit decreases.

Keywords: Financial frictions; Credit spreads; Monetary policy; Macroprudential policy; Optimal policy mix; Currency union (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Optimal Monetary and Macroprudential Policy in a Currency Union (2016)
Working Paper: Optimal Monetary and Macroprudential Policy in a Currency Union (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:93:y:2019:i:c:p:167-186

DOI: 10.1016/j.jimonfin.2019.01.008

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