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Macroprudential and monetary policy rules in a model with collateral constraints

Piotr Żoch

No 37, GRAPE Working Papers from GRAPE Group for Research in Applied Economics

Abstract: We compare welfare and macroeconomic effects of monetary policy and macroprudential policy, in particular targeting loan-to-value (LTV) ratios. We develop a DSGE model with collateral constraints and two types of agents. In this setup, we study seven potential policy rules responding to credit growth and fluctuations in prices of collateral. We show that monetary policy responding to deviations of collateral prices from their steady state value results in the highest level of social welfare. It is also useful in stabilizing output and inflation. Macroprudential policy using LTV ratio as the instrument is dominated in terms of output and inflation stability by the interest rate rules. If interest rate rules are not available, the LTV ratio can be used to improve welfare, but gains are small..

Keywords: discounted collateral constraint; financial friction; macroprudential policy (search for similar items in EconPapers)
JEL-codes: E30 E32 E44 E52 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2019
New Economics Papers: this item is included in nep-dge and nep-mac
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http://grape.org.pl/WP/37_Zoch_website.pdf (application/pdf)

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Journal Article: Macroprudential and Monetary Policy Rules in a Model with Collateral Constraints (2020) Downloads
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