Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93662
Authors: 
De Paoli, Bianca
Paustian, Matthias
Year of Publication: 
2013
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 653
Abstract: 
The financial crisis has prompted macroeconomists to think of new policy instruments that could help ensure financial stability. Policymakers are interested in understanding how these should be set in conjunction with monetary policy. We contribute to this debate by analyzing how monetary and macroprudential policy should be conducted to reduce the costs of macroeconomic fluctuations. We do so in a model in which such costs are driven by nominal rigidities and credit constraints. We find that, if faced with cost-push shocks, policy authorities should cooperate and commit to a given course of action. In a world in which monetary and macroprudential tools are set independently and under discretion, our findings suggest that assigning conservative mandates (á la Rogoff [1985]) and having one of the authorities act as a leader can mitigate coordination problems. At the same time, choosing monetary and macroprudential tools that work in a similar fashion can increase such problems.
Subjects: 
monetary policy
macroprudential policy
commitment
discretion
policy coordination
borrowing constraints
JEL: 
E32
C32
Document Type: 
Working Paper

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