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Monetary policy, macroprudential policy, and financial stability

David Martinez-Miera and Rafael Repullo ()

No 2297, Working Paper Series from European Central Bank

Abstract: This paper reexamines from a theoretical perspective the role of monetary and macroprudential policies in addressing the build-up of risks in the financial system. We construct a stylized general equilibrium model in which the key friction comes from a moral hazard problem in firms financing that banks’ equity capital serves to ameliorate. Tight monetary policy is introduced by open market sales of government debt, and tight macroprudential policy by an increase in capital requirements. We show that both policies are useful, but macroprudential policy is more effective in fostering financial stability and leads to higher social welfare. JEL Classification: G21, G28, E44, E52

Keywords: bank monitoring; capital requirements; financial stability; intermediation margin; macroprudential policy; monetary policy (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Related works:
Working Paper: Monetary Policy, Macroprudential Policy, and Financial Stability (2019) Downloads
Working Paper: Monetary Policy, Macroprudential Policy, and Financial Stability (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20192297

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