Unpleasant Monetarist Arithmetic: Macroprudential Edition

Abstract

This paper shows that the recent trend of separating macroprudential and monetary policies (M&Ms) into two autonomous institutions is undesirable. A strategic (game of chicken type) conflict is likely to occur, whereby each M&M ignores exuberant credit booms, trying to induce the other institution to tighten conditions. This has been observed, for example, in Sweden and Norway after 2010. We postulate a generalised concept of stochastic leadership and argue that greater rigidities give the prudential authority the upper hand strategically on the central bank. We show how this leads to a second type of unpleasant monetarist arithmetic and costly economic fluctuations.

Debt stabilization and financial stability in a monetary union: Market versus authority‐based preventive solutions

“…Christos Mavrodimitrakis https://orcid.org/0000-0002-7436-9164 ENDNOTES 1 In a recent paper, Libich (2020) argues that the separation set-up of monetary and macro-prudential policies to different authorities is not desirable due to an inherent strategic conflict between those policies. 2 Further references include Anevlavis et al (2019), Engwerda, , Engwerda, van Aarle, Plasmans, and Weeren (2013), Tabellini (1986), andVieira, Machado, andRibeiro (2018).…”

“…1 1 In a recent paper, Libich (2020) argues that the separation set‐up of monetary and macro‐prudential policies to different authorities is not desirable due to an inherent strategic conflict between those policies. …”