Macroprudential policy instruments and economic imbalances in the euro area

Marcin Kolasa, Michal Brzoza-Brzezina and Krzysztof Makarski

No 1589, Working Paper Series from European Central Bank

Abstract: Since its creation the euro area suffered from imbalances between its core and peripheral members. This paper checks whether macroprudential policy tools - applied in a countercyclical fashion as known from the DSGE literature to the peripheral countries - could contribute to providing more macroeconomic stability in this region. To this end we build a two-economy macrofinancial DSGE model and simulate the effects of macroprudential tools under the assumption of asymmetric shocks hitting the core and the periphery. We find that a countercyclical application of macroprudential tools is able to partly make up for the loss of independent monetary policy in the periphery. Moreover, LTV policy seems more efficient than regulating capital adequacy ratios. However, for the policies to be effective, they must be set individually for each region. Area-wide policy is almost ineffective in this respect. JEL Classification: E32, E44, E58

Keywords: DSGE with banking sector; euro-area imbalances; macroprudential policy (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Working Paper: Macroprudential policy and imbalances in the euro area (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20131589

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