Preventive monetary and macroprudential policy response to anticipated shocks to financial stability
Konstantin Styrin () and
No wps80, Bank of Russia Working Paper Series from Bank of Russia
In this paper, we develop a simple framework to study the optimal macroprudential and monetary policy interactions in response to financial shocks. Our model combines nominal rigidities and capital accumulation, features that have usually been studied separately in previous literature. In our model, we show that agents do not internalise how their asset purchases affect asset prices. Thus, when crises occur, there are fire sales: less demand for capital further reduces prices and agents are worse off. Policy interventions (both monetary and macroprudential) can improve allocations by restricting borrowing ex-ante (during the accumulation of risks and imbalances) and stimulating the economy ex-post (during crises). As a result, we find a complementary relationship between ex-ante monetary policy and preventive macroprudential policy. We also compare this result with a flexible-price model and a frictionless model and conduct several sensitivity analysis exercises.
Keywords: Macroprudential policy; monetary policy; pecuniary externalities; nominal rigidities; financial frictions; capital accumulation. (search for similar items in EconPapers)
JEL-codes: D62 E44 E58 G28 (search for similar items in EconPapers)
Pages: 53 pages
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac, nep-mon, nep-ore and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:bkr:wpaper:wps80
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