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The Interdependence of Monetary and Macroprudential Policy under the Zero Lower Bound

Vivien Lewis () and Stefania Villa ()

No 310, Working Paper Research from National Bank of Belgium

Abstract: This paper considers the interdependence of monetary and macroprudential policy in a New Keynesian business cycle model under the zero lower bound constraint. Entrepreneurs borrow in nominal terms from banks and are subject to idiosyncratic default risk. The realized loan return to the bank varies with aggregate risk, such that bank balance sheets are affected by higher-than-expected rm defaults. Monetary and macroprudential policies are given by an interest rate rule and a capital requirement rule, respectively. We first characterize the model's stability properties under different steady state policies. We then analyze the transmission of a risk shock under the zero lower bound and different macroprudential policies. We finally investigate whether these policies are indeed optimal.

Keywords: Triffin; European Payments Union (EPU); international monetary system (IMS) (search for similar items in EconPapers)
JEL-codes: A11 B27 B31 F02 F33 F36 N24 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2016-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:201610-310

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