Concerted efforts? Monetary policy and macro-prudential tools

Andrea Ferrero, Richard Harrison () and Benjamin Nelson
Additional contact information
Richard Harrison: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 727, Bank of England working papers from Bank of England

Abstract: The inception of macro-prudential policy frameworks in the wake of the global financial crisis raises questions of how macro-prudential and monetary policies should be coordinated. We examine these questions through the lens of a macroeconomic model featuring nominal rigidities, housing, incomplete risk-sharing between borrower and saver households, and macro-prudential tools in the form of mortgage loan-to-value and bank capital requirements. We derive a welfare-based loss function which suggests a role for active macro-prudential policy to enhance risk sharing. Macro-prudential policy faces trade-offs, however, and complete macro-prudential stabilization is not generally possible in our model. Nonetheless, simulations of a house price boom and subsequent correction suggest that macro-prudential tools could alleviate debt-deleveraging and help avoid zero lower bound episodes, even when macro-prudential tools themselves impose only occasionally binding constraints on debt dynamics in the economy.

Keywords: Monetary policy; macro-prudential policy; time-consistent policy; policy coordination; occasionally binding constraints (search for similar items in EconPapers)
JEL-codes: E32 E61 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2018-05-25
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://www.bankofengland.co.uk/-/media/boe/files/ ... E24F702E69834E50C156 Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0727

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().