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Diana Lima
- 11 May 2023
- OCCASIONAL PAPER SERIES - No. 272Details
- Abstract
- Since the European Central Bank’s (ECB’s) 2003 strategy review, the importance of macro-financial amplification channels for monetary policy has increasingly gained recognition. This paper takes stock of this evolution and discusses the desirability of further incremental enhancements in the role of financial stability considerations in the ECB’s monetary policy strategy. The paper starts with the premise that macroprudential policy, along with microprudential supervision, is the first line of defence against the build-up of financial imbalances. It also recognises that the pursuit of price stability through monetary policy, and of financial stability through macroprudential policy, are to a large extent complementary. Nevertheless, macroprudential policy may not be able to ensure financial stability independently of monetary policy, because of spillovers originating from the common transmission channels through which the two policies produce their effects. For example, a low interest rate environment can create incentives to engage in more risk-taking, or can adversely impact the profitability of financial intermediaries and hence their capacity to absorb shocks. The paper argues that the existence of such spillovers creates a conceptual case for monetary policy to take financial stability considerations into account. It then goes on to discuss what this conclusion might imply in practice for the ECB. One option would be to exploit the flexible length of the medium-term horizon over which price stability is to be achieved. Longer deviations from price stability could occasionally be tolerated, if they resulted in materially lower risks for financial stability and, ultimately, for future price stability. However, model-based quantitative analysis suggests that this approach may require impractically drawn-out periods of deviation from price stability and potentially result in a de-anchoring of inflation expectations. ...
- JEL Code
- E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
G01 : Financial Economics→General→Financial Crises
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
- 15 March 2023
- OCCASIONAL PAPER SERIES - No. 310Details
- Abstract
- Macroprudential policies since the global financial crisis have been central to safeguarding financial stability. Despite the increasing use of multiple policy instruments, a detailed understanding of interactions among them is still needed to assess how instrument combinations can enhance the effectiveness of macroprudential action. This paper proposes a conceptual framework for informing the choice of combinations of macroprudential instruments, looking at the role of micro and macroeconomic transmission channels, interactions across policy objectives, the importance of country specificities and linkages with other macroeconomic or supervisory policies. It also reviews considerations related to circumvention, leakages, time of activation and communication of policies, all of which may affect the desirability of different combinations of macroprudential instruments. The paper also discusses a possible operational use of combinations of macroprudential instruments to address selected risks and provides a rich analysis of instrument interactions within the categories of borrower-based and, respectively, capital-based measures. The paper concludes that the combinations of capital and borrower-based instruments ensures a comprehensive coverage of different systemic risks and entail important synergies.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 27 April 2015
- WORKING PAPER SERIES - No. 1784Details
- Abstract
- In the aftermath of the financial crisis, the role of monetary policy and macro-prudential regulation in promoting financial stability is under discussion. The old debate concerning whether monetary policy should respond to credit and asset price bubbles was revived, whereas macro-prudential regulation is being assessed as an alternative macroeconomic tool to deal with financial imbalances. The paper explores both sides of the debate in a New Keynesian framework with financial frictions by comparing the welfare and stabilisation impacts of distinct policy regimes. First, we investigate whether there is a welfare benefit from monetary policy leaning against financial instability. We show that monetary policy rules of this type perform better than conventional monetary rules. Second, by introducing macro-prudential regulation in the model, results from optimal policy analysis suggest also that there are welfare gains, even in the case in which monetary and macro-prudential authorities are independent and react to their own policy goal.
- JEL Code
- E30 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→General
E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation