Monetary and Macroprudential Policy Coordination Among Multiple Equilibria
IMF Working Papers, November 2, 2018
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- Monetary and Macroprudential Policy Coordination Among Multiple Equilibria
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Bibliographic details
- Authors: Itai Agur
- Published: November 2, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484380642.001
Summary
- The paper examines coordination between monetary and macroprudential authorities using a game theory setup.
- It contrasts results from models with unique equilibria to those with multiple equilibria and shows qualitatively different outcomes when multiple equilibria arise.
- One authority (macroprudential) uses a coarse tool while the other (monetary policy) is unconstrained; this asymmetry always leads to multiple equilibria.
- Under economically relevant conditions, the authorities prefer different equilibria.
- Introducing a weight for the unconstrained authority on "helping" the constrained authority ("leaning against the wind") produces a hump-shaped relation between that weight and the difficulty of coordinating, implying that a small degree of leaning can worsen outcomes for both authorities' objectives.
Main findings
- Asymmetry of tools (coarse macroprudential tool versus unconstrained monetary policy) always generates multiple equilibria.
- Different equilibria are ranked differently by the two authorities; preferences conflict under economically relevant conditions.
- The effect of the unconstrained authority "leaning against the wind" is non-monotonic:
- The relation between the leaning weight and coordination difficulty is hump-shaped.
- A small degree of leaning can worsen outcomes on both authorities' objectives.
Mechanism and theoretical implications
- Monetary and macroprudential tools impose externalities on each other's objectives.
- Multiple equilibria change qualitative policy interactions compared with unique-equilibrium models.
- The unconstrained authority's ability to "help" alters the set of equilibria and the coordination problem in unexpected ways.
Policy implications and recommendations
- Policymakers should recognize that tool asymmetries can generate multiple equilibria and conflicting equilibrium preferences.
- Small, discretionary efforts by an unconstrained monetary authority to support macroprudential objectives may backfire and worsen outcomes for both authorities.
- Designing coordination mechanisms must account for the hump-shaped relation between helping-weight and coordination difficulty; naive increases in leaning are not guaranteed to improve joint outcomes.
Key publication fact
- Date: November 2, 2018
IMF Working Paper — Monetary and Macroprudential Policy Coordination Among Multiple Equilibria
Content in this bundle
- Monetary and Macroprudential Policy Coordination Among Multiple Equilibria, WP/18/235, November 2018