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Macroprudential policy measures: macroeconomic impact and interaction with monetary policy

Gabriele Cozzi, Matthieu Darracq Paries (), Peter Karadi (), Jenny Körner, Christoffer Kok (), Falk Mazelis, Kalin Nikolov (), Elena Rancoita, Alejandro Van der Ghote and Julien Weber

No 2376, Working Paper Series from European Central Bank

Abstract: This paper examines the interactions of macroprudential and monetary policies. We find, using a range of macroeconomic models used at the European Central Bank, that in the long run, a 1% bank capital requirement increase has a small impact on GDP. In the short run, GDP declines by 0.15-0.35%. Under a stronger monetary policy reaction, the impact falls to 0.05-0.25%. The paper also examines how capital requirements and the conduct of macroprudential policy affect the monetary transmission mechanism. Higher bank leverage increases the economy's vulnerability to shocks but also monetary policy's ability to offset them. Macroprudential policy diminishes the frequency and severity of financial crises thus eliminating the need for extremely low interest rates. Countercyclical capital measures reduce the neutral real interest rate in normal times. JEL Classification: E4, E43, E5, E52, G20, G21

Keywords: bank stability; credit; monetary policy (search for similar items in EconPapers)
Date: 2020-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
Note: 604093
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