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Will macroprudential policy counteract monetary policy’s effects on financial stability? Bruegel Working Paper Issue 01 / 2018

Agur, Itai and Demertzis, Maria (2018) Will macroprudential policy counteract monetary policy’s effects on financial stability? Bruegel Working Paper Issue 01 / 2018. [Working Paper]

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    Abstract

    HHow does monetary policy impact upon macroprudential regulation? This paper models monetary policy’s transmission to bank risk taking, and its interaction with a regulator’s optimization problem. The regulator uses its macroprudential tool, a leverage ratio, to maintain financial stability, while taking account of the impact on credit provision. A change in the monetary policy rate tilts the regulator’s entire trade-off. We show that the regulator allows interest rate changes to partly “pass through” to bank soundness by not neutralizing the risk-taking channel of monetary policy. Thus, monetary policy affects financial stability, even in the presence of macroprudential regulation

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    Item Type: Working Paper
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > banks/financial markets
    EU policies and themes > Policies & related activities > economic and financial affairs > monetary policy
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Bruegel (Brussels) > Working Papers
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 08 Feb 2018 12:42
    Number of Pages: 29
    Last Modified: 08 Feb 2018 12:57
    URI: http://aei.pitt.edu/id/eprint/93247

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