Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154217
Authors: 
Levine, Paul
Lima, Diana
Year of Publication: 
2015
Series/Report no.: 
ECB Working Paper 1784
Abstract: 
In the aftermath of the financial crisis, the role of monetary policy and macro-prudential regulation in promoting financial stability is under discussion. The old debate concerning whether monetary policy should respond to credit and asset price bubbles was revived, whereas macro-prudential regulation is being assessed as an alternative macroeconomic tool to deal with financial imbalances. The paper explores both sides of the debate in a New Keynesian framework with financial frictions by comparing the welfare and stabilisation impacts of distinct policy regimes. First, we investigate whether there is a welfare benefit from monetary policy leaning against financial instability. We show that monetary policy rules of this type perform better than conventional monetary rules. Second, by introducing macro-prudential regulation in the model, results from optimal policy analysis suggest also that there are welfare gains, even in the case in which monetary and macro-prudential authorities are independent and react to their own policy goal.
Subjects: 
DSGE
Financial frictions
macro-prudential policy
monetary policy
JEL: 
E30
E50
G28
ISBN: 
978-92-899-1597-7
Document Type: 
Working Paper

Files in This Item:
File
Size
916.23 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.