Working Paper (2013-04) - Interactions between monetary and macroprudential policy
The recent financial crisis has highlighted that price stability does not ensure financial stability. In light of the previous regulation shortcomings, financial regulation reforms focus on macroprudential policy. It aims to maintain global financial stability, i.e. to ensure the prevention of systemic risk ex ante and the mitigation of its potential impact on the real economy in times of crisis.
This working paper first clarifies the concept of macroprudential policy, and gives the definitions underlying its implementation and its operational framework, that is to say, the future macroprudential instruments (monitoring, supervision or regulation instruments).
The deployment of such a policy may however raise conflicting coordination issues with the price stability objective of the monetary policy. In order to identify the optimal policy regimes and institutional arrangements, the mainstream macro modelisation had to fill gaps in the representation of financial intermediaries. In order to provide a substantial framework that incorporates financial intermediation and its interactions whith the real and financial economy, the sophistication of standard models is performed by the progressive introduction of “financial frictions” empirically observed, opening the way to a better understanding of the transmission channels of risk. This paper reviews the relevant literature, and the recent modeling results assessing the optimal coordinated implementation of monetary and macroprudential policies, and the possible evolution of model-based simulations of those mechanisms.
- Key words: monetary policy; financial stability; macroprudential policy; DSGE.
- Author: Caroline Le Moign, Task Analysis Centre of Strategic Finance Economics Department
- No. 2013-04, March 2013