Macroprudential and monetary policy rules: a welfare analysis

Margarita Rubio, José A. Carrasco-gallego

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Abstract

This paper studies the interaction between macroprudential and monetary policies using a dynamic stochastic general equilibrium model. The model features a housing market. There are borrowers, who need collateral to obtain loans, and savers. Monetary policy is conducted following a Taylor rule for the interest rate. The macroprudential policy is represented by a Taylor-type rule for the loan-to- value ratio reacting to output and house prices. Results show that introducing the macroprudential rule or extending the interest rate rule to respond to house prices increases welfare, since it enhances financial stability. However, when we evaluate the optimal policy mix, we and that when both policies act together in a coordinated way, monetary policy should focus on ensuring price stability while the macroprudential authority should care about financial stability.
rule or extending the interest rate rule to respond to house prices increases welfare, since it enhances
…nancial stability. However, when we evaluate the optimal policy mix, we …nd that when both policies
act together in a coordinated way, monetary policy should focus on ensuring price stability while the
macroprudential authority should care about …nancial stability.
Original languageEnglish
Pages (from-to)127-152
Number of pages26
JournalThe Manchester School
Volume83
Issue number2
Early online date2 Jan 2015
DOIs
Publication statusPublished - 1 Mar 2015

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