## Will Macroprudential Policy Counteract Monetary Policy’s Effects on Financial Stability?

_IMF Working Papers, December 29, 2015_

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## Bibliographic details
- Authors: Itai Agur, Maria Demertzis
- Published: December 29, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513545332.001

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### Overview
- Authors: Itai Agur, Maria Demertzis
- Date: December 29, 2015
- Core question: How does monetary policy impact upon macroprudential regulation?
- Approach: A model of monetary policy transmission to bank risk taking and its interaction with a regulator's optimization problem.
- Macroprudential tool analyzed: a leverage ratio used by the regulator to maintain financial stability while accounting for effects on credit provision.
- Central insight: A change in the monetary policy rate tilts the regulator's entire trade-off; the regulator allows interest rate changes to partly "pass through" to bank soundness by not neutralizing the risk-taking channel of monetary policy.

### Key findings
- The regulator does not fully neutralize the risk-taking channel of monetary policy.
- Monetary policy affects financial stability even in the presence of macroprudential regulation.
- The trade-off faced by the regulator includes maintaining financial stability via leverage constraints and preserving credit provision.

### Policy implications and interpretations
- Macroprudential policy (via a leverage ratio) interacts with monetary policy rather than fully offsetting its effects on bank risk-taking.
- Regulators may optimally permit some pass-through of monetary policy changes to banks’ risk profiles to balance stability and credit supply objectives.
- Coordination considerations: The results imply that monetary policy decisions will have implications for financial stability that macroprudential policy alone will not eliminate.

### Subject classifications
- Bank soundness
- Banking
- Central bank policy rate
- Financial crises
- Financial sector policy and analysis
- Financial sector stability
- Financial services
- Macroprudential policy

### Keywords
- bank leverage
- bank regulator
- bank risk
- Bank soundness
- Central bank policy rate
- Financial sector stability
- Global
- Macroprudential
- Macroprudential policy
- monetary policy rate change
- risk choice
- risk profile
- Supervision
- Transmission
- WP

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/will-macroprudential-policy-counteract-monetary-policys-effects-on-financial-stability-43501_