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In the quest for macroprudential policy tools

Daniel Samano ()

in Premio de Banca Central Rodrigo Gómez / Central Banking Award "Rodrigo Gómez" from Centro de Estudios Monetarios Latinoamericanos, CEMLA

Abstract: The global financial crisis of late 2008 could not have provided more convincing evidence that price stability is not a sufficient condition for financial stability. In order to attain both, central banks must develop macroprudential instruments in order to prevent the occurrence of systemic risk episodes. For this reason testing the effectiveness of different macroprudential tools and their interaction with monetary policy is crucial. In this paper we explore whether two policy instruments, namely, a capital adequacy ratio rule in combination with a Taylor rule may provide a better macroeconomic outcome than a Taylor rule alone. We conduct our analysis by appending a macroeconometric financial block to an otherwise standard semistructural neokeynesian model of an small open economy for policy analysis estimated for the Mexican economy. Our results show that with the inclusion of the second instrument, the central bank may obtain substantial gains. Specifically, the central authority can isolate financial shocks and dampen their effects over macroeconomic variables.

Keywords: Macroprudential policy; Taylor rule; Keynesian model; Mexico (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 G28 (search for similar items in EconPapers)
Date: 2011
ISBN: 978-607-7734-39-0
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Working Paper: In the Quest of Macroprudential Policy Tools (2011) Downloads
Working Paper: In the quest of macroprudential policy tools (2011) Downloads
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