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Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area

Author/Editor: Dominic Quint | Pau Rabanal
Authorized for Distribution: October 14, 2013
Electronic Access: Free Full Text (PDF file size is 720KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and financial frictions, and hence both monetary and macroprudential policy can play a role. We find that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policy would always increase the welfare of savers, but their effects on borrowers depend on the shock that hits the economy. In particular, macroprudential policy may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads.
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Series: Working Paper No. 13/209
Subject(s): Monetary policy | Euro Area | European Economic and Monetary Union | Macroprudential Policy | Credit expansion | Economic models
    Published:   October 14, 2013        
    ISBN/ISSN:   9781484333693/1018-5941   Format:   Paper
    Stock No:   WPIEA2013209   Pages:   60
    Price:   US$18.00
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