Monetary Policy, Macroprudential Policy, and Financial Stability

44 Pages Posted: 19 Feb 2019

See all articles by David Martinez Miera

David Martinez Miera

Charles III University of Madrid; Center for Economic Policy Research

Rafael Repullo

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2019

Abstract

This paper reexamines from a theoretical perspective the role of monetary and macroprudential policies in addressing the build-up of risks in the financial system. We construct a stylized general equilibrium model in which the key friction comes from a moral hazard problem in firms' financing that banks' equity capital serves to ameliorate. Tight monetary policy is introduced by open market sales of government debt, and tight macroprudential policy by an increase in capital requirements. We show that both policies are useful, but macroprudential policy is more effective in terms of financial stability and leads to higher social welfare.

Keywords: Bank monitoring, Capital requirements, Financial Stability, intermediation margin, macroprudential policy, monetary policy

JEL Classification: E44, E52, G21, G28

Suggested Citation

Martinez Miera, David and Repullo, Rafael, Monetary Policy, Macroprudential Policy, and Financial Stability (February 2019). CEPR Discussion Paper No. DP13530, Available at SSRN: https://ssrn.com/abstract=3336788

David Martinez Miera (Contact Author)

Charles III University of Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Center for Economic Policy Research ( email )

London
United Kingdom

Rafael Repullo

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91429 0551 (Phone)
+34 91429 1056 (Fax)

HOME PAGE: http://www.cemfi.es/~repullo/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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