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Will macroprudential policy counteract monetary policy’s effects on financial stability?

Itai Agur () and Maria Demertzis

Working Papers from Bruegel

Abstract: How does monetary policy impact upon macroprudential regulation? This paper models monetary policy’s transmission to bank risk taking, and its interaction with a regulator’s optimization problem. The regulator uses its macroprudential tool, a leverage ratio, to maintain financial stability, while taking account of the impact on credit provision. A change in the monetary policy rate tilts the regulator’s entire trade-off. The authors show that the regulator allows interest rate changes to partly “pass through” to bank soundness by not neutralizing the risk-taking channel of monetary policy. Thus, monetary policy affects financial stability, even in the presence of macroprudential regulation

New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2018-01
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Working Paper: Will Macroprudential Policy Counteract Monetary Policy’s Effects on Financial Stability? (2015) Downloads
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