Targeting Financial Stability: Macroprudential or Monetary Policy?

TY - JOUR

T1 - Targeting Financial Stability: Macroprudential or Monetary Policy?

AU - Aikman, David

AU - Giese, Julia

AU - Kapadia, Sujit

AU - McLeay, Micheal

PY - 2023/3

Y1 - 2023/3

N2 - This paper explores monetary-macroprudential policy interactions in a simple, calibrated New Keynesian model incorporating the possibility of a credit boom precipitating a financial crisis and a loss function reflecting financial stability considerations. Deploying the countercyclical capital buffer (CCyB) improves outcomes significantly relative to when interest rates are the only instrument. The instruments are typically substitutes, with monetary policy loosening when the CCyB tightens. We also examine when the instruments are complements and assess how different shocks, the effective lower bound for monetary policy, market-based finance, and a risktaking channel of monetary policy affect our results.

AB - This paper explores monetary-macroprudential policy interactions in a simple, calibrated New Keynesian model incorporating the possibility of a credit boom precipitating a financial crisis and a loss function reflecting financial stability considerations. Deploying the countercyclical capital buffer (CCyB) improves outcomes significantly relative to when interest rates are the only instrument. The instruments are typically substitutes, with monetary policy loosening when the CCyB tightens. We also examine when the instruments are complements and assess how different shocks, the effective lower bound for monetary policy, market-based finance, and a risktaking channel of monetary policy affect our results.

M3 - Article

SN - 1815-4654

VL - 19

JO - International journal of central banking

JF - International journal of central banking

IS - 1

ER -