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When the Central Bank Meets the Financial Authority: Strategic Interactions and Institutional Design

Victoria Nuguer, Jessica Roldan-Pena, Enrique Mendoza and Julio Carrillo ()
Additional contact information
Jessica Roldan-Pena: Banco de Mexico
Enrique Mendoza: University of Pennsylvania

Authors registered in the RePEc Author Service: Jessica Roldán Peña ()

No 1461, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We investigate the strategic interactions between the central bank and a financial authority in an economy distorted with nominal rigidities and credit frictions, and hit by financial shocks. Using a policy-rule approach, we find that introducing an independent financial instrument increases consumers’ welfare, versus the alternative of a central bank alone leaning against the financial shocks. Also, we find that when the two policymakers maximize welfare (our ideal case), the Nash equilibrium corresponds to the first best. However, under our implementable case, the policymakers face a conflict in objectives, as the central bank focuses on the stability of prices, while the financial authority on the stability of the credit spread. In such a case, cooperation across institutions is second best, while Nash is third best. However, if the policymakers have the same objectives, cooperation and Nash coincide and are second best.

New Economics Papers: this item is included in nep-dge and nep-mon
Date: 2016
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Related works:
Working Paper: Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies (2017) Downloads
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