Christopher otrok university of missouri federal reserve bank of st. Macroprudential policy and financial stability in the caribbean. The gains come from a higher nancial stability and a higher. Financial stability and optimal interestrate policy. Financial stability and macroprudential policy were the missing pillars to ensure proper supervision of the financial system. We consider a dynamic stochastic general equilibrium dsge model. Macrofinancial stability and macroprudential analysis. Reserve requirements and optimal chinese stabilization policy 3 on average more productive than soes hsieh and klenow, 2009. Under such a situation, accompanied with a lack of room of the monetary policy, policy makers shed light on the policy measures including macroprudential policy for nancial stability as a new frontier of the macro policy. Optimal policy for macro financial stability, working papers 2012041, federal reserve bank of st. Apr 16, 2012 what the maths tells you is the following. The analysis of financial system distress via the ses method can be considered as a new tool of macroprudential policy which take into consideration all elements of the. Macroprudential policy frameworks macroprudential policy frameworks vary significantly across jurisdictions. Enhancing financial stability and resilience group of thirty.
There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing. Financial policy tightening and credit growth capacity. Lopez federal reserve bank of san francisco abstract the introduction of macroprudential responsibilities at central banks and. Suppose the optimal policy when a financial crisis is endogenous is expressed in the form of a modified price target like the one i have just. Detailed changes to the financial stability policy are included in attachment a. It is therefore desirable that central banks also play a role in financial stability policies, both at the micro and macro levels. There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. Financial stability policies for shadow banking tobias adrian federal reserve bank of new york staff reports, no.
Macro prudential policy and financial stability in the caribbean. Optimal policy for macrofinancial stability ideasrepec. Even when set optimally from a microprudential perspective, capital. Thus, while i believe that, in most circumstances, the goals of monetary policy and financial stability are complementary, we need to recognize that, at times, actions taken to foster financial stability and. Financial stability and optimal interestrate policy andrea ajello thomas laubach david l opezsalido taisuke nakata federal reserve board august 2016 abstract we study optimal interestrate policy in a new keynesian model in which the economy can experience nancial crises and the probability of a crisis depends on credit conditions. This debate revolves around the role of monetary and. Macrofinancial stability and macroprudential analysis pdf 98. Monetary policy in normal times in normal times the ecbs monetary policy strategy, in line with its definition of price stability, aims to keep inflation rates below, but close to, 2% over the medium term. Monetary policy alone cannot be expected to achieve financial stability effectively or. Moreover, we examine if monetary policy and macroprudential regulation should jointly target non. It is therefore desirable that central banks also play a. Under such a situation, accompanied with a lack of room for monetary policy, policy makers shed light on. Optimal policy for macrofinancial stability gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, and eric r. Louis alessandro rebucci johns hopkins university cepr and nber eric r.
Monetary union strengthened the covariation pattern between the output cycle and the nancial cycle, while macronancial policies at. This debate in advanced economies revolves around the role of macroeconomic and regulatory policies in causing the global crisis and how the conduct. Macroprudential policy and financial stability 83 83 inflation, the need to take into account the behavior of asset prices in setting monetary policy. E44, g00, g01, g28 abstract this paper explores financial stability policies for the shadow banking system. Louis alessandro rebucci interamerican development bank eric r. The report is defined as a policy that broadly promote security and stability of financial systems and payment mechanisms. Financial stability and sustainability under the coordination. We consider a dynamic stochastic general equilibrium dsge model with housing and collateral constraints. The micro and macroprudential dimensions of financial stability promising discussions are often derailed by lack of precision in the definition of terms, when interlocutors think they share the same understanding but, in fact, do not. In this paper, we show that the same set of policy tools that. Financial stability and optimal interestrate policy andrea ajello thomas laubach david l opezsalido taisuke nakata federal reserve board february 2015 abstract we study optimal interestrate policy in. Financial stability, growth and macroprudential policy. We build a twosector dsge model to study reserve requirement adjustments, a frequentlyused policy tool for macro stabilization in china.
What was the role of monetary policy and financial regulation in contributing to vulnerabilities. Calibrating macroprudential policy to forecasts of financial stability scott a. Suppose the optimal policy when a financial crisis is endogenous is expressed in the form of a modified price target like the one i have just described. Calibrating macroprudential policy to forecasts of financial stability.
Cgbs conference, june 56, 2014 the views expressed are those of the author and not necessarily those of the central bank of trinidad and. Hsieh and song, 2015, holding all else equal, this. New framework for measuring and managing macrofinancial risk. Price stability, financial stability and efficiency, and. Then we solve for the optimal, timeconsistent macroprudential policy of a regulator.
This study examines the challenges faced by central banks in implementing macroprudential policies, while having limited experience. Arguably, the debate on the micro and macroprudential dimensions of financial stability is one such example. Crockett jpmorgan chase international, stefan ingves sveriges riksbank. Loose fiscal policy, rising credit activity, and heightened risk. Then we solve for the optimal, timeconsistent macroprudential policy of a regulator who cannot commit to future policies, and compute a statecontingent schedule of debt taxes that supports the optimal allocations as a competitive equilibrium. Macroprudential policy and financial stability in the. Yet history shows that financial crises wreak havoc with public finances. Overall, being responsible for monetary policy means that central banks have an intrinsic and deep interest in a stable financial system.
International finance and macroeconomics, monetary economics. Insurance industry perspective ravi rambarran ceo sagicor international garp caribbean global association of risk professionals may. The analysis of financial system distress via the ses method can be considered as a new tool of macro prudential policy which take into consideration all elements of the financial system and how they interact with each other and with the economy as a whole. Financial stability generally, and financial cycles in. Insurance industry perspective ravi rambarran ceo sagicor international garp caribbean global association of risk professionals may 2015. Cgbs conference, june 56, 2014 the views expressed are those of the author and not necessarily those of the central bank of. Attachment b is the revised financial stability policy. Calibrating macroprudential policy to forecasts of financial. Suppose also that policy did tighten to head off the possibility of a crisis, and this led to lower output and inflation than would otherwise have. Macroprudential supervision and financial stability reshma mahabir, ph. Financial crises reveal critical roles of nancial markets by inducing real economic disruptions. Optimal policy for macro financial stability, idb publications working papers 4202, interamerican development bank. If however the policy maker has access to two instruments, it is optimal to act only during crisis times.
Economic fluctuations and growth, international finance and macroeconomics, monetary economics. Should not fiscal policy, too, be an essential part of the postcrisis macrofinancial stability framework. Further, i believe that the careful monitoring of the financial system now carried out by fed staff members, particularly those in the office of financial stability policy and research, and by the fsoc contributes to the stability of the u. Calibrating macroprudential policy to forecasts of. Literature on macroprudential policy appears not to be close to. Lane trinity college dublin and cepr august 2015 abstract this paper examines the cyclical behaviour of countrylevel macronancial variables under emu. Towards a financial stabilityoriented fiscal policy.
Lopez federal reserve bank of san francisco abstract the introduction of. Thus, while i believe that, in most circumstances, the goals of monetary policy and financial stability are complementary, we need to recognize that, at times, actions taken to foster financial stability and those taken to promote our monetary policy goals might be in conflict, at least in the short run. How can monetary policy be adapted to achieve greater financial stability. Financial stability and optimal interestrate policy andrea ajello thomas laubach david l opezsalido taisuke nakata federal reserve board february 2015 abstract we study optimal interestrate policy in a new keynesian model in which the economy is at risk of experiencing a nancial crisis and the probability of a crisis depends on credit. Under such a situation, accompanied with a lack of room for monetary policy, policy makers shed light on policy measures including macroprudential policy for onancial stability as a new tool of macro economic policy. Gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, and eric r. We suggest an integrated micromacro approach with two core virtues. Under such a situation, accompanied with a lack of room of the monetary policy, policy makers shed light on.
Financial crises reveal critical roles of onancial markets by inducing real economic disruptions. Financial stability division, central bank of ireland, new wapping street, north wall quay, dublin 1. These normative analyses build upon the concept of constrained efficient allocation, where the social planner is constrained by the same borrowing limit that agents face. New framework for measuring and managing macrofinancial. Third and finally, we propose a computational algorithm to solve markovperfect optimal policy for problems in which the policy function is not differentiable. Macro prudential supervision and financial stability reshma mahabir, ph. The reserve banks approach to financial stability is evolving and is becoming more intensive and more intrusive in terms of both regulation and supervision.
What are the lessons from the crisis for the design of macro prudential policies and regulations. Financial stability generally, and financial cycles in particular, hardly feature in the design of fiscal policy. Financial stability division, central bank of ireland, po box 11517, north wall quay, spencer dock, dublin 1. Macroprudential policy, tools, and systems for the future. Optimal policy for macro financial stability gianluca benigno london school of economics huigang chen marketshare partners christopher otrok university of missouri federal reserve bank of st. Optimal policy for macrofinancial stability gianluca benigno london school of economics huigang chen marketshare partners christopher otrok university of missouri federal reserve bank of st. Optimal policy for macrofinancial stability federal reserve. Optimal policy for macrofinancial stability gianluca benigno federal reserve bank of new york lse and cepr huigang chen uber technologies inc. Alfi financial stability division, sama deputyship of research and international affairs. For more information on the outlook see geoff bascands speech titled the reserve bank is renewing its approach to financial stability. New framework for measuring and managing macrofinancial risk and financial stability dale f. Young federal reserve bank of new york staff reports, no.
Evidence on central banks twin objective, monetary and financial stability, is scarce. Citeseerx optimal policy for macrofinancial stability. Fy20082009 business planning parameters sections b1 through b10 were added. Then we solve for the optimal, timeconsistent macroprudential policy of a regulator who cannot commit to future policies, and compute a statecontingent schedule of debt. Other sources appear more behavioral, for example, when investors chase similar. Federal reserve board macroprudential policy in the u. Five points about monetary policy and financial stability. Macro financial stability and macroprudential analysis pdf 98. Financial stability and optimal interestrate policy andrea ajello thomas laubach david l opezsalido taisuke nakata federal reserve board august 2016 abstract we study optimal interestrate policy in a.
Price stability, financial stability and efficiency, and monetary policy speech by lucas papademos, vice president of the ecb at the third conference of the monetary stability foundation on. Monetary policy in normal times in normal times the ecbs monetary policy strategy, in line with its definition of price. Hoenig president, federal reserve bank of kansas city. Apr 07, 2011 in this context, numerous questions have arisen. Further, i believe that the careful monitoring of the financial system now carried out by fed staff members, particularly those in the office of financial stability policy and research, and by the fsoc. Optimal policy for macro financial stability gianluca benigno federal reserve bank of new york lse and cepr huigang chen uber technologies inc. Credit booms and macrofinancial stability request pdf. Price stability, financial stability and efficiency, and monetary policy speech by lucas papademos, vice president of the ecb at the third conference of the monetary stability foundation on challenges to the financial system ageing and low growth frankfurt am main, 7 july 2006. In this paper, we analyze the implications of macroprudential and monetary policies for business cycles, welfare, and financial stability. Macroprudential supervision and financial stability. Rethinking financial stability and macroprudential policy.
How does household debt affect macroeconomic and financial stability. How to deal with credit booms giovanni dellariccia, deniz igan, luc laeven, and hui tong, with bas bakker and jerome vandenbussche i n t e r n a t i o n a l m o n e t a r y f u n d. This article discusses the establishment of the macro financial stability mfs section in the reserve bank and some of the potential financial instability issues new zealand. Optimal policy for macrofinancial stability new york fed. Monetary policy, fiscal policy and financial stability.
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