Monetary and macroprudential policy interactions in a model of the European Union

Richard Dennis and Pelin Ilbas

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We use the two-country euro-area model developed by Quint and Rabanal (2014) to study policymaking in the European Monetary Union (EMU). We focus on strategic interactions: 1) between an EMU-level monetary authority and an EMU-level macro-prudential authority, and; 2) between an EMU-level monetary authority and regional macro-prudential authorities. In the former, price stability and financial stability are pursued at the EMU level, while in the latter each macro-prudential authority adopts region-specific objectives. We compare cooperative and non-cooperative equilibria in simultaneous-move and leadership environments, each obtained assuming discretionary policymaking. Further, we assess the effects on policy performance of assigning shared objectives across policymakers and of altering the relative importance attached to different policy objectives. In the three-policymaker setting, we find that regional macro-prudential policymakers play an important role in achieving regional stability.

Keywords: Monetary policy; macro-prudential policy; policy coordination (search for similar items in EconPapers)
JEL-codes: E42 E44 E52 E58 E61 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2022-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2022-33

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