Optimal Monetary and Macroprudential Policies

41 Pages Posted: 13 May 2021 Last revised: 6 Jul 2023

See all articles by Josef Schroth

Josef Schroth

Government of Canada - Bank of Canada

Date Written: July 05, 2023

Abstract

Monetary and macroprudential policy makers trade off financial stability and economic efficiency. This paper builds a model in which banks supply liquidity services through deposits and use them to fund loans and safe bond holdings. Expansive monetary policy can increase loan repayments but also provides liquidity to non-banks which shifts deposit demand downward and lowers the liquidity premium of deposits. Optimally coordinated policies reveal two key complementarities over financial cycles. First, during normal times additional risk-weight add-ons for bonds are complementary to additional capital buffers. Second, during crisis times monetary-policy tightening is complementary to releasing capital buffers.

Keywords: Financial frictions, Financial intermediation, Market discipline, Access to funding, Macroprudential capital regulation, Monetary policy

JEL Classification: E44, E60, G21, G28

Suggested Citation

Schroth, Josef, Optimal Monetary and Macroprudential Policies (July 05, 2023). Available at SSRN: https://ssrn.com/abstract=3845028 or http://dx.doi.org/10.2139/ssrn.3845028

Josef Schroth (Contact Author)

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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