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Macroprudential Policy in a Monetary Union

Salim Dehmej () and Leonardo Gambacorta ()

Comparative Economic Studies, 2019, vol. 61, issue 2, 195-212

Abstract: Abstract Using a simple New Keynesian model of a monetary union that incorporates financial frictions, we show that country-targeted macroprudential policy could complement a single monetary policy at the union level. In particular, macroprudential policy helps taming financial and economic imbalances in the presence of countercyclical financial shocks and imperfect transmission of monetary policy to financial conditions in a monetary union. These results are even stronger when different economies are hit by asymmetric shocks that cancel out without provoking any monetary policy reaction. In addition, we show that when coordinated with monetary policy, country-targeted macroprudential policy (implemented by national or supranational authorities) has advantages over a federally implemented policy that reacts to average financial indicators.

Keywords: Monetary union; Macroprudential policy; New Keynesian model (search for similar items in EconPapers)
JEL-codes: E12 E50 F45 G18 (search for similar items in EconPapers)
Date: 2019
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