DP13530 Monetary Policy, Macroprudential Policy, and Financial Stability
|Author(s):||David Martinez-Miera, Rafael Repullo|
|Publication Date:||February 2019|
|Keyword(s):||Bank monitoring, Capital requirements, Financial Stability, intermediation margin, macroprudential policy, monetary policy|
|JEL(s):||E44, E52, G21, G28|
|Programme Areas:||Financial Economics, Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13530|
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.