Citation

Discussion Paper Details

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Title: Monetary Policy, Macroprudential Policy, and Financial Stability

Author(s): David Martinez-Miera and Rafael Repullo

Publication Date: February 2019

Keyword(s): Bank monitoring, Capital requirements, Financial Stability, intermediation margin, macroprudential policy and monetary policy

Programme Area(s): Financial Economics and Monetary Economics and Fluctuations

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13530

Bibliographic Reference

Martinez-Miera, D and Repullo, R. 2019. 'Monetary Policy, Macroprudential Policy, and Financial Stability'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13530