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Working Paper
Dichotomy between macroprudential policy and monetary policy on credit and inflation
This paper examines the different effects of macroprudential policy and monetary policy on credit and inflation using a simple New Keynesian model with credit. In this model, macroprudential policy is effective in stabilizing credit but has a limited effect on inflation. Monetary policy with an interest rate rule stabilizes inflation, but this rule is ?too blunt? an instrument to stabilize credit. The determinacy of the model requires the interest rate?s response to inflation to be greater than one for one and independent of macroprudential policy. That is, the ?Taylor principle? applies to ...
Working Paper
Macroprudential policy: its effects and relationship to monetary policy
This paper examines the interactions of macroprudential policy and monetary policy in a New Keynesian DSGE model with financial frictions. Macroprudential policy can stabilize credit cycles. However, a macroprudential instrument that aims to stabilize a specific segment of the credit market can cause regulatory arbitrage, that is, a reallocation of credit to a less regulated part of the market. Within this model, welfare-maximizing monetary policy aims to stabilize only inflation and macroprudential policy only stabilizes credit. Two aspects of the model account for this dichotomy. First, ...