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Macroprudential and monetary policies: implications for financial stability and welfare

Rubio, Margarita; Carrasco-Gallego, José A.

Authors

José A. Carrasco-Gallego jose.carrasco-gallego@port.ac.uk



Abstract

In this paper, we analyze the implications of macroprudential and monetary policies for business cycles, welfare, and financial stability. We consider a dynamic stochastic general equilibrium (DSGE) model with housing and collateral constraints. A macroprudential rule for the loan-to-value ratio (LTV), which responds to credit growth, interacts with a traditional Taylor rule for monetary policy. We compute the optimal parameters of these rules both when monetary and macroprudential policies act in a coordinated and in a non-coordinated way. We find that both policies acting together unambiguously improves the stability of the system. In both cases, this interaction is welfare improving for the society, especially in the case of the non-coordinated game. There is though a trade-off between borrowers and savers. However, borrowers can compensate the saver’s welfare loss View the MathML sourcela Kaldor–Hicks to achieve a Pareto-superior outcome.

Journal Article Type Article
Publication Date Mar 6, 2014
Journal Journal of Banking and Finance
Print ISSN 0378-4266
Electronic ISSN 0378-4266
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 49
APA6 Citation Rubio, M., & Carrasco-Gallego, J. A. (2014). Macroprudential and monetary policies: implications for financial stability and welfare. Journal of Banking and Finance, 49, doi:10.1016/j.jbankfin.2014.02.012
DOI https://doi.org/10.1016/j.jbankfin.2014.02.012
Keywords Macroprudential, Monetary Policy, Welfare, Financial Stability, Loan-to-Value, Kaldor–Hicks Efficiency
Publisher URL http://www.sciencedirect.com/science/article/pii/S0378426614000740
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0





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