Trade-offs between macroeconomic and financial stability objectives

Fouejieu, Armand; Popescu, Alexandra; Villieu, Patrick

doi:10.1016/j.econmod.2019.02.006

Cited by 18 publications

(13 citation statements)

References 13 publications

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“…Therefore, we define financial instability as the build‐up of asset price deviation from its fundamental value. Accordingly, we primarily simplify the endogenous asset price bubbles model a la Fouejieu, Popescu, and Villieu (2019), earlier found in Blanchard and Watson (1982):

\begin{matrix} σ = f (σ_{e}, P_{br}) + ε_{σ} \\ \frac{\partial σ}{\partial σ_{e}} > 0; \frac{\partial σ}{\partial P_{br}} < 0 \end{matrix}

where σ , σ e , P br , 1− P br and ε σ are actual asset price deviation from its fundamental value, expected value of σ , probability of the bubble to persist, probability of the bubble to burst and exogenous shock, respectively.…”

Section: Simple Modelmentioning

confidence: 99%

“…In other words, it suggests that the bubble is self‐driven and may change without any connection to fundamental factors. For instance, the asset price bubble is self‐fulfilling when

\partial σ_{e} > 1

, which characterises the over‐optimistic market expectations (Fouejieu et al ., 2019). For the value of P br , we define P br in a sigmoid pattern in which the probability of the bubble to persist is a function of z :

P_{br} = f false(z false)

where z is defined as the log odds ratio between P br and 1‐ P br ,

\ln (\frac{P_{br}}{1 ‐ P_{br}}) = z

…”

Section: Simple Modelmentioning

confidence: 99%

“…(2001), Malkiel (2010), and Fouejieu et al . (2019) use stock‐market‐based indicators, specifically the Morgan Stanley Capital International (MSCI) stock index as a measure of asset price bubbles. This suggests that the stock market may approximately reflect asset price misalignment.…”

Section: Empirical Strategymentioning

confidence: 99%

“…Specifically, the model also involves several control variables such as trade openness, exchange rates and debt‐to‐GDP ratio (e.g. see Fouejieu et al ., 2019). The model is as follows:

\begin{matrix} ρ_{i, t} = α_{8} + δ_{3} ρ_{i, t ‐ 1} + α_{9} {CMP}_{i, t} + α_{10} ({CMP}_{i, t} \times {FCB}_{i, t}) + τ Q_{i, t} + u_{i, t} \\ ρ_{i, t} = α_{8} + δ_{3} ρ_{i, t ‐ 1} + (α_{9} + α_{10} {FCB}_{i, t}) {CMP}_{i, t} + τ Q_{i, t} + u_{i, t} \end{matrix}

where ρ , τQ and

()(, α_{9} + α_{10} {FCB}_{i, t})

are stock volatility, the vector of parameters and control variables, and the net effect of monetary policy credibility on stock volatility, respectively.…”

Section: Empirical Strategymentioning

confidence: 99%

“…This implies that the conduct of monetary policy may constrain the ability of a central bank to target financial stability with monetary policy instruments. Fouejieu et al (2019) provide a framework to investigate trade-off between macroeconomic and financial stability when the central bank has a financial stability objective. Relying on a New Keynesian model with an endogenous financial bubble, their simulations suggest that a central bank attempting to "lean against the wind" may face trade-off between inflation/output stability, and financial stability.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Inflation and Financial Stability Trade‐off: Role of Monetary Policy Credibility and Fiscal Cyclicality

Kurnia

Izzulhaq

Maharda

et al. 2020

J of App Econs and Policy

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This paper examines the role of monetary credibility and fiscal cyclicality in generating the trade‐off between inflation rates and financial stability. We systematically develop simple theoretical models to shape the rationalisation framework, which demonstrates the role of fiscal cyclicality behaviour in arousing a trade‐off for the monetary policy to target low inflation rates and a stable financial system at the same time. By utilising the generalised method of moment (GMM), we find that a credible monetary policy generates a trade‐off between inflation and financial stability as long as the fiscal policy is procyclical.

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\begin{matrix} σ = f (σ_{e}, P_{br}) + ε_{σ} \\ \frac{\partial σ}{\partial σ_{e}} > 0; \frac{\partial σ}{\partial P_{br}} < 0 \end{matrix}

Section: Simple Modelmentioning

confidence: 99%

“…In other words, it suggests that the bubble is self‐driven and may change without any connection to fundamental factors. For instance, the asset price bubble is self‐fulfilling when

\partial σ_{e} > 1

P_{br} = f false(z false)

where z is defined as the log odds ratio between P br and 1‐ P br ,

\ln (\frac{P_{br}}{1 ‐ P_{br}}) = z

…”

Section: Simple Modelmentioning

confidence: 99%

Section: Empirical Strategymentioning

confidence: 99%

“…Specifically, the model also involves several control variables such as trade openness, exchange rates and debt‐to‐GDP ratio (e.g. see Fouejieu et al ., 2019). The model is as follows:

\begin{matrix} ρ_{i, t} = α_{8} + δ_{3} ρ_{i, t ‐ 1} + α_{9} {CMP}_{i, t} + α_{10} ({CMP}_{i, t} \times {FCB}_{i, t}) + τ Q_{i, t} + u_{i, t} \\ ρ_{i, t} = α_{8} + δ_{3} ρ_{i, t ‐ 1} + (α_{9} + α_{10} {FCB}_{i, t}) {CMP}_{i, t} + τ Q_{i, t} + u_{i, t} \end{matrix}

where ρ , τQ and

()(, α_{9} + α_{10} {FCB}_{i, t})

are stock volatility, the vector of parameters and control variables, and the net effect of monetary policy credibility on stock volatility, respectively.…”

Section: Empirical Strategymentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Inflation and Financial Stability Trade‐off: Role of Monetary Policy Credibility and Fiscal Cyclicality

Kurnia

Izzulhaq

Maharda

et al. 2020

J of App Econs and Policy

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show abstract

Macroprudential policy, economic crises and economic growth

You

Sharon

Guo

2023

DESD

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Slow global economic growth, frequent fluctuations in international financial markets, and increasing wealth disparity have become common concerns facing the globe. Risk prevention and stable economic growth have become the basic requirements for high-quality economic development, and macroprudential policy tools are at the center of these two policy objectives. This paper constructs a unified empirical analysis framework and incorporates the two policy objectives of preventing economic crises and stabilizing economic growth to analyze the comprehensive effects of macroprudential policy. Using data from 100 economies from 2000 to 2017, we find that the impact of macroprudential policy on economic growth can be divided into direct and indirect channels. For all economies, macroprudential policy can indirectly promote economic growth by suppressing economic crises, but its direct effect is heterogeneous. Furthermore, the heterogeneity of the direct effect of macroprudential policy on economic growth is mainly generated through channels such as investment, loan interest rates, and leverage. In high-income economies, the direct impact of macroprudential policy on economic growth is not obvious; in middle- and high-income economies, it promotes economic growth by influencing investment and leverage; in low- and lower-middle-income economies, it hinders economic growth through investment and loan interest rates.

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Interest rate policy and interbank market breakdown

Nückles

2020

Economic Modelling

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Trade-offs between macroeconomic and financial stability objectives

Cited by 18 publications

References 13 publications

Inflation and Financial Stability Trade‐off: Role of Monetary Policy Credibility and Fiscal Cyclicality

Inflation and Financial Stability Trade‐off: Role of Monetary Policy Credibility and Fiscal Cyclicality

Macroprudential policy, economic crises and economic growth

Interest rate policy and interbank market breakdown

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