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Macroprudential Policies and Monetary Policy

Paper Session

Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)

Marriott Marquis, Grand Ballroom 2
Hosted By: American Economic Association
  • Chair: Nellie Liang, Brookings Institution

Credit Booms, Financial Crises and Macroprudential Policy

Mark Gertler
,
New York University
Nobuhiro Kiyotaki
,
Princeton University
Andrea Prestipino
,
Federal Reserve Board

Abstract

We develop a model of banking panics in which banking crises are usually preceded by credit booms, and credit booms often do not result in crises. We study macroprudential regulation in this model. In particular, how does optimal policy weigh the benefits of preventing a crisis against the costs of stopping a good boom, and what are the features of optimal regulation?

Monetary and Macroprudential Policy with Endogenous Risk

Tobias Adrian
,
International Monetary Fund
Fernando Duarte
,
Federal Reserve Bank of New York
Nellie Liang
,
Brookings Institution
Pawel Zabczyk
,
International Monetary Fund

Abstract

We extend the New Keynesian (NK) model to include endogenous risk. The conditional volatility of the output gap is proportional to the price of risk, giving rise to a "vulnerability channel" of monetary policy: lower interest rates not only shift consumption intertemporally, but also conditional output risk. Policy makers thus face an intertemporal risk-return tradeoff: via the impact on risk-taking, easy monetary policy lowers short-term downside risks to growth, but increases medium-term risks. The model fits estimates of the conditional output gap term structure and can be used to jointly consider monetary and macroprudential policy. The policy prescriptions are very different from those in the standard NK model: central banks' focus purely on inflation and output-gap stabilization can lead to financial and real instability. Macroprudential measures can help reduce the intertemporal risk-return tradeoff of the central bank created by the vulnerability channel.

Borrower and Lender Resilience

Anil K. Kashyap
,
University of Chicago
Guido Lorenzoni
,
Northwestern University

Abstract

We consider the efficacy of various macroprudential policies. To do so, we build a model in which a credit contraction can be caused by a fall in credit demand, supply, or both. Due to an aggregate demand externality, this generates a need for prudential policies that operate both on the borrowers' and on the lenders' side. In particular, borrower deleveraging can amplify shocks and if (as in the US), the regulator has no tools for addressing this possibility, that macroprudential policy will be limited in its effectiveness.
Discussant(s)
Juliane Begenau
,
Stanford University
Sylvain Leduc
,
Federal Reserve Bank of San Francisco
Anton Korinek
,
University of Virginia
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • G2 - Financial Institutions and Services