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Macroprudential policy transmission and interaction with fiscal and monetary policy in an emerging economy: a DSGE model for Brazil

Fabia A. Carvalho and Marcos R. Castro

Macroeconomics and Finance in Emerging Market Economies, 2017, vol. 10, issue 3, 215-259

Abstract: We investigate the transmission of macroprudential (MaP) instruments in a dynamic stochastic general equilibrium model where foreign capital flows interact with financial frictions and banks are exposed to different sources of credit default risk. The model is estimated for Brazil with Bayesian techniques. We compute optimal combinations of simple MaP, fiscal and monetary policy rules that can react to the business and/or the financial cycle. We find that the gains from implementing a cyclical fiscal policy are only significant if MaP policy countercyclically reacts to the financial cycle. Optimal fiscal policy is countercyclical in the business cycle.

Date: 2017
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