Optimal Monetary and Macroprudential Policies
41 Pages Posted: 13 May 2021 Last revised: 6 Jul 2023
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: Suggested Citation