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Macroeconomic and financial stability in a monetary union: the case of Lithuania

Rubio, Margarita; Comunale, Mariarosaria

Authors

Mariarosaria Comunale



Abstract

In this paper, we study the implications for macroeconomic and financial stability of macroprudential policies in a monetary union. With this purpose, we develop a two-country monetary union new Keynesian general equilibrium model with housing and collateral constraints, to be calibrated for Lithuania and the rest of the euro area. We consider two different scenarios for macroprudential policies: one in which the ECB extends its goals to also include financial stability and a second one in which a national macroprudential authority uses the loan-to-value ratio (LTV) as an instrument. Results show that both rules are effective in bringing a more stable financial system in both countries, and especially in Lithuania. This is because the financial sector in this country is more sensitive to shocks. We find that an extended Taylor rule is indeed effective in reducing the volatility of credit but it comes with a cost in terms of higher inflation volatility. The simple LTV rule on its side, does not compromise the objective of monetary policy. This reinforces the "Tinbergen principle" which argues that there should be two different instruments when there are two different policy goals.

Citation

Rubio, M., & Comunale, M. (2018). Macroeconomic and financial stability in a monetary union: the case of Lithuania. Economic Systems, 42(1), https://doi.org/10.1016/j.ecosys.2017.04.002

Journal Article Type Article
Acceptance Date Apr 20, 2017
Online Publication Date Dec 12, 2017
Publication Date Mar 7, 2018
Deposit Date May 2, 2017
Publicly Available Date Dec 13, 2018
Journal Economic Systems
Print ISSN 0939-3625
Electronic ISSN 0939-3625
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 42
Issue 1
DOI https://doi.org/10.1016/j.ecosys.2017.04.002
Keywords Macroprudential policy, housing market, LTV, monetary union, financial stability
Public URL http://eprints.nottingham.ac.uk/id/eprint/42374
Publisher URL https://www.sciencedirect.com/science/article/pii/S0939362517301127?via%3Dihub
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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