Optimal Monetary and Prudential Policies
American Economic Journal: Macroeconomics
vol. 9,
no. 1, January 2017
(pp. 40-87)
Abstract
The recent financial crisis has highlighted the interconnectedness between macroeconomic and financial stability, raising questions about how to combine monetary and prudential policies. This paper characterizes the jointly optimal monetary and prudential policies, setting the interest rate and bank-capital requirements. The source of financial fragility is the socially excessive risk taking by banks due to limited liability and deposit insurance. We provide conditions under which locally (Ramsey) optimal policy dedicates the prudential instrument to preventing inefficient risk taking by banks, and the monetary instrument to dealing with the business cycle, with the two instruments covarying either negatively, or positively and countercyclically.Citation
Collard, Fabrice, Harris Dellas, Behzad Diba, and Olivier Loisel. 2017. "Optimal Monetary and Prudential Policies." American Economic Journal: Macroeconomics, 9 (1): 40-87. DOI: 10.1257/mac.20140139Additional Materials
JEL Classification
- E32 Business Fluctuations; Cycles
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
- E52 Monetary Policy
- G01 Financial Crises
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G28 Financial Institutions and Services: Government Policy and Regulation
There are no comments for this article.
Login to Comment