The Interaction of Monetary and Macroprudential Policies in Economic Stabilisation

Macroprudential regulation and leakage to the shadow banking sector

“…In addition to an inflation-targeting central bank, they introduce a macroprudential regulator adjusting a tax/subsidy on bank capital according to a simple policy rule aiming at 6 See Chen (2001), Meh and Moran (2010), Christensen et al (2011), or Silvo (2015).…”

“…In the famework, limited liability and deposit insurance cause excessive risk-taking in the financial sector. Silvo (2015) uses a New Keynesian framework augmented by Holström and Tirole (1997) to evaluate Ramsey-optimal policies.…”

Institutional mandates for macroeconomic and financial stability

“…The first would have been to use systematically simple, implementable rules for both the monetary authority and the financial regulator, as for instance in Bailliu et al (2015) and Levine and Lima (2015). The second approach would have been to solve for the (constrained) Ramsey problem by maximising a utility-based measure of social welfare, as for instance in De Paoli and Paustian (2013), Collard et al (2016), andSilvo (2016).…”

“…By contrast, financial stability risks often develop over a longer horizon, because financial booms and busts tend to last longer than traditional business cycles. Zilberman (2015), Benes and Kumhoff (2015), Bailliu et al (2015), Levine and Lima (2015), Collard et al (2016), Silvo (2016), De Paoli and Paustian (2017), and Gelain and Ilbas (2017). Collard et al (2016) and De Paoli and Paustian (2017) for instance study policy coordination and optimal interactions between instruments in a setting that involves separate prudential and monetary authorities with potentially different objectives.…”