This paper examines the different effects of macroprudential policy and monetary policy on credit and inflation using a simple New Keynesian model with credit. In this model, macroprudential policy is effective in stabilizing credit but has a limited effect on inflation. Monetary policy with an interest rate rule stabilizes inflation, but this rule is 'too blunt' an instrument to stabilize credit. The determinacy of the model requires the interest rate's response to inflation to be greater than one for one and independent of macroprudential policy. That is, the 'Taylor principle' applies to monetary policy. This dichotomy between macroprudential policy and monetary policy arises because each policy is designed to differently affect the saving and borrowing decisions of households.
This paper examines the interactions of macroprudential policy and monetary policy in a New Keynesian DSGE model with financial frictions. Macroprudential policy can stabilize credit cycles. However, a macroprudential instrument that aims to stabilize a specific segment of the credit market can cause regulatory arbitrage, that is, a reallocation of credit to a less regulated part of the market. Within this model, welfare-maximizing monetary policy aims to stabilize only inflation and macroprudential policy only stabilizes credit. Two aspects of the model account for this dichotomy. First, credit stabilization is welfare improving because lower volatility is compensated by higher mean equilibrium credit and capital. Second, monetary policy is sub-optimal for credit stabilization. The reason is that it operates on the decisions of borrowers and savers, while macroprudential policy operates only on the decisions of borrowers.
This study investigates the macroeconomic determinants behind the number of foreign visitors to Korean casinos arriving from major source countries, namely Japan, Mainland China, Hong Kong SAR and Taiwan. Using monthly data from 2006 to 2016, we utilized a Structural Vector Autoregression (SVAR) model to investigate the dynamic effects of macroeconomic factors on the number of casino visitors. Estimation results supported the conclusion that visitors from Japan and Mainland China-who account for approximately three quarters of the total number of foreign casino visitors-were affected by macroeconomic or financial indicators such as changes in oil prices, exports and exchange rates (Japan), exports and short-term interest rates (Mainland China). In contrast, visitors from Hong Kong SAR did not seem to be influenced by any of these factors. We also found that the MERS (Middle East Respiratory Syndrome) outbreak in Korea in 2015 had a significant adverse effect on casino visitors from all regions. Implications and suggestions for future studies are provided along with the results of this study.
We estimate a Dynamic Stochastic General Equilibrium (DSGE) model with various financial frictions and analyze how well the model explains the Great Recession. Predictive analysis shows that the model can only slightly better explain the large deviation from trend during the crisis relative to a model without financial frictions. Specifically, the risk premium shock, which is a shock to the external finance premium of the entrepreneurs' leverage, explains the largest part of the investment downfall during the crisis. However, the 'balance sheet' channel of financial frictions in the model, which structurally links balance sheet conditions of financial intermediaries and nonfinancial borrowers to their borrowing rates, is estimated to be weak. We examine alternative prior specifications for how the financial frictions enter the model and continue to find a limited role for these frictions. Rolling-window estimation provides evidence for substantial time variation in parameters governing financial frictions. We conclude that the well-known financial frictions studied in this paper are not able to explain the financial crisis in a linearized and estimated model.
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