Monetary and Macroprudential Policy Coordination Among Multiple Equilibria

Author/Editor:

Itai Agur

Publication Date:

November 2, 2018

Electronic Access:

Free Full Text. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

The notion of a tradeoff between output and financial stabilization is based on monetary-macroprudential models with unique equilibria. Using a game theory setup, this paper shows that multiple equilibria lead to qualitatively different results. Monetary and macroprudential authorities have tools that impose externalities on each other's objectives. One of the tools (macroprudential) is coarse, while the other (monetary policy) is unconstrained. We find that this asymmetry always leads to multiple equilibria, and show that under economically relevant conditions the authorities prefer different equilibria. Giving the unconstrained authority a weight on "helping" the constrained authority ("leaning against the wind") now has unexpected effects. The relation between this weight and the difficulty of coordinating is hump-shaped, and therefore a small degree of leaning worsens outcomes on both authorities' objectives.

Series:

Working Paper No. 18/235

Subject:

English

Publication Date:

November 2, 2018

ISBN/ISSN:

9781484380642/1018-5941

Stock No:

WPIEA2018235

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

31

Please address any questions about this title to publications@imf.org