Targeting financial stability: macroprudential or monetary policy?

David Aikman (), Julia Giese (), Sujit Kapadia and Michael McLeay ()
Additional contact information
Julia Giese: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Michael McLeay: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 734, Bank of England working papers from Bank of England

Abstract: This paper explores monetary-macroprudential policy interactions in a simple, calibrated New Keynesian model incorporating the possibility of a credit boom precipitating a financial crisis and a loss function reflecting financial stability considerations. Deploying the countercyclical capital buffer (CCyB) improves outcomes significantly relative to when interest rates are the only instrument. The instruments are typically substitutes, with monetary policy loosening when the CCyB tightens. We also examine when the instruments are complements and assess how different shocks, the effective lower bound for monetary policy, market-based finance and a risk-taking channel of monetary policy affect our results.

Keywords: Macroprudential; monetary policy; financial stability; capital buffer; financial crises; credit boom (search for similar items in EconPapers)
JEL-codes: E52 E58 G01 G28 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2018-06-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-knm, nep-mac and nep-mon
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Citations: View citations in EconPapers (17)

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Related works:
Journal Article: Targeting Financial Stability: Macroprudential or Monetary Policy? (2023)
Working Paper: Targeting financial stability: macroprudential or monetary policy? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0734

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