The Macroprudential Toolkit: Effectiveness and Interactions

Millard, Stephen; Rubio, Margarita; Varadi, Alexandra

Abstract

We use a DSGE model with financial frictions and with macroprudential limits on both banks and mortgage borrowers, in the form of capital requirements and maximum debt‐service ratios. We then examine: (i) the impact of different combinations of macroprudential limits on key macroeconomic aggregates; (ii) their interaction with each other and with monetary policy; and (iii) their effects on the volatility of key macroeconomic variables and on welfare. We find that capital requirements on banks are the optimal tool when faced with a financial shock, as they nullify the effects of financial frictions and reduce the effects of the shock on the real economy. Instead, limits on mortgage debt‐service ratios are optimal following a housing demand shock, as they disconnect the housing market from the real economy, reducing the volatility of inflation. Hence, no policy on its own is sufficient to deal with a wide range of shocks.

Citation

Millard, S., Rubio, M., & Varadi, A. (2024). The Macroprudential Toolkit: Effectiveness and Interactions. Oxford Bulletin of Economics and Statistics, 86(2), 335-384. https://doi.org/10.1111/obes.12582

• Journal Article Type: Article
• Acceptance Date: Sep 11, 2023
• Online Publication Date: Nov 30, 2023
• Publication Date: 2024-04
• Deposit Date: Sep 11, 2023
• Publicly Available Date: Dec 1, 2025
• Journal: Oxford Bulletin of Economics and Statistics
• Print ISSN: 0305-9049
• Electronic ISSN: 1468-0084
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 86
• Issue: 2
• Pages: 335-384
• DOI: https://doi.org/10.1111/obes.12582
• Keywords: Macroprudential Policy, Monetary Policy, Leverage Ratio, Affordability Constraint, Collateral Constraint
• Public URL: https://nottingham-repository.worktribe.com/output/25201285
• Publisher URL: https://onlinelibrary.wiley.com/doi/10.1111/obes.12582