Monetary and Macroprudential Policy Coordination Among Multiple Equilibria
Itai Agur ()
No 18/235, IMF Working Papers from International Monetary Fund
The notion of a tradeoff between output and financial stabilization is based on monetary-macroprudential models with unique equilibria. Using a game theory setup, this paper shows that multiple equilibria lead to qualitatively different results. Monetary and macroprudential authorities have tools that impose externalities on each other's objectives. One of the tools (macroprudential) is coarse, while the other (monetary policy) is unconstrained. We find that this asymmetry always leads to multiple equilibria, and show that under economically relevant conditions the authorities prefer different equilibria. Giving the unconstrained authority a weight on "helping" the constrained authority ("leaning against the wind") now has unexpected effects. The relation between this weight and the difficulty of coordinating is hump-shaped, and therefore a small degree of leaning worsens outcomes on both authorities' objectives.
Keywords: Central banks and their policies; Macroprudential Policy; Financial stability; Multiple objectives, Leaning, Noncooperative Games, Government Policy and Regulation (search for similar items in EconPapers)
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Journal Article: Monetary and macroprudential policy coordination among multiple equilibria (2019)
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