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Concerted efforts? Monetary policy and macro-prudential tools

Andrea Ferrero (), Richard Harrison () and Benjamin Nelson ()

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)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2018-05-25
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0727

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