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Macroprudential Rules and Monetary Policy when Financial Frictions Matter

Jeannine Bailliu (), Cesaire Meh () and Yahong Zhang ()

Staff Working Papers from Bank of Canada

Abstract: This paper examines the interaction between monetary policy and macroprudential policy and whether policy makers should respond to financial imbalances. To address this issue, we build a dynamic general equilibrium model that features financial market frictions and financial shocks as well as standard macroeconomic shocks. We estimate the model using Canadian data. Based on these estimates, we show that it is beneficial to react to financial imbalances. The size of these benefits depends on the nature of the shock where the benefits are larger in the presence of financial shocks that have broader effects on the macroeconomy.

Keywords: Economic models; Financial markets; Financial stability; Monetary policy framework (search for similar items in EconPapers)
JEL-codes: E42 E50 E60 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2012
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Journal Article: Macroprudential rules and monetary policy when financial frictions matter (2015) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:12-6

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