Targeting financial stability: macroprudential or monetary policy?

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 08 June 2018

Staff Working Paper No. 734
By David Aikman, Julia Giese, Sujit Kapadia and Michael McLeay

This paper explores monetary-macroprudential policy interactions in a simple, calibrated New Keynesian model incorporating the possibility of a credit boom precipitating a financial crisis and a loss function reflecting financial stability considerations. Deploying the countercyclical capital buffer (CCyB) improves outcomes significantly relative to when interest rates are the only instrument. The instruments are typically substitutes, with monetary policy loosening when the CCyB tightens. We also examine when the instruments are complements and assess how different shocks, the effective lower bound for monetary policy, market-based finance and a risk-taking channel of monetary policy affect our results. 

PDFTargeting financial stability: macroprudential or monetary policy?

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