Optimal Monetary and Macroprudential Policy in a Currency Union
The financial crisis proved strikingly that stabilizing the price level is a neces- sary but not a sufficient condition to ensure macroeconomic stability. The obvious candidate for addressing systemic risk is macroprudential policy. In this paper we study the optimal monetary and macroprudential po...
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| Published in: | MAGKS - Joint Discussion Paper Series in Economics (Band 22-2015) |
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| Main Authors: | , |
| Format: | Article |
| Language: | English |
| Published: |
2015
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| Subjects: | |
| Online Access: | PDF Full Text |
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| Summary: | The financial crisis proved strikingly that stabilizing the price level is a neces-
sary but not a sufficient condition to ensure macroeconomic stability. The obvious candidate for addressing systemic risk is macroprudential policy. In this paper we study the optimal monetary and macroprudential policy mix in a currency union in the case of different kinds of aggregate and idiosyncratic shocks. The monetary and macroprudential instruments are modelled as independent tools. With a union-wide macroprudential tool, full absorption on the aggregate level is possible, but welfare losses due to fluctuations in relative variables prevail. With country-specific macroprudential tools, full absorption of shocks is always possible. But it is only optimal as long as there is no ine¢ cient labor allocation. Comparing di¤erent policy regimes, we get the following ranking in terms of welfare: discretion outperforms strict inflation targeting which outperforms a (euro-area based) Taylor Rule. |
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| Physical Description: | 37 Pages |
| ISSN: | 1867-3678 |
| DOI: | 10.17192/es2024.0382 |