Unpleasant Monetarist Arithmetic: Macroprudential Edition

Abstract

The 2008 crisis highlighted the linkages between the financial sector and the real economy, as well as between the corresponding stabilization policies: macroprudential and monetary (M&Ms). Our game-theoretic analysis focuses on the increasingly adopted separation setup, in which M&Ms are conducted by two different institutions (e.g. in Australia, Canada, Eurozone, Sweden, Switzerland and the United States). We show that separated policy M&Ms are not as sweet as their chocolate counterparts, in fact they may turn sour. The main reason is that a strategic conflict is likely to arise between the autonomous prudential authority and the central bank in addressing exuberant credit booms,

Fiscal-Monetary-Financial Stability Interactions in a Data-Rich Environment

“…The need for such coordination stems from the observation that monetary and macroprudential policy tools are not independent, as they affect both the monetary and credit conditions via their effect on credit growth (Malovana and Frait, 2017). At the same time, the best economic outcomes can be expected if both policies are used in a complementary manner and are executed by a single institution (Libich, 2017). Galati and Moessner (2013) provide an overview of research on monetarymacroprudential policy interactions.…”