{
  "title": "Monetary and Macroprudential Policy Coordination Among Multiple Equilibria",
  "publication": "IMF Working Papers, November 2, 2018",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2018/11/02/monetary-and-macroprudential-policy-coordination-among-multiple-equilibria-46289",
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  "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.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- The paper examines coordination between monetary and macroprudential authorities using a game theory setup.\n- It contrasts results from models with unique equilibria to those with multiple equilibria and shows qualitatively different outcomes when multiple equilibria arise.\n- One authority (macroprudential) uses a coarse tool while the other (monetary policy) is unconstrained; this asymmetry always leads to multiple equilibria.\n- Under economically relevant conditions, the authorities prefer different equilibria.\n- 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."
    },
    {
      "heading": "Main findings",
      "content": "- Asymmetry of tools (coarse macroprudential tool versus unconstrained monetary policy) always generates multiple equilibria.\n- Different equilibria are ranked differently by the two authorities; preferences conflict under economically relevant conditions.\n- The effect of the unconstrained authority \"leaning against the wind\" is non-monotonic:\n  - The relation between the leaning weight and coordination difficulty is hump-shaped.\n  - A small degree of leaning can worsen outcomes on both authorities' objectives."
    },
    {
      "heading": "Mechanism and theoretical implications",
      "content": "- Monetary and macroprudential tools impose externalities on each other's objectives.\n- Multiple equilibria change qualitative policy interactions compared with unique-equilibrium models.\n- The unconstrained authority's ability to \"help\" alters the set of equilibria and the coordination problem in unexpected ways."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Policymakers should recognize that tool asymmetries can generate multiple equilibria and conflicting equilibrium preferences.\n- Small, discretionary efforts by an unconstrained monetary authority to support macroprudential objectives may backfire and worsen outcomes for both authorities.\n- 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."
    },
    {
      "heading": "Key publication fact",
      "content": "- Date: November 2, 2018\n\nIMF Working Paper — Monetary and Macroprudential Policy Coordination Among Multiple Equilibria\n\n---\n\n Content in this bundle\n\n- Monetary and Macroprudential Policy Coordination Among Multiple Equilibria, WP/18/235, November 2018\n  - Monetary and Macroprudential Policy Coordination Among Multiple Equilibria, WP/18/235, November 2018 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Monetary and Macroprudential Policy Coordination Among Multiple Equilibria, WP/18/235, November 2018 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2018/11/02/monetary-and-macroprudential-policy-coordination-among-multiple-equilibria-46289"
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    "Authors: Itai Agur",
    "Published: November 2, 2018",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484380642.001",
    "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.",
    "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:",
    "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.",
    "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.",
    "Date: November 2, 2018",
    "**Monetary and Macroprudential Policy Coordination Among Multiple Equilibria, WP/18/235, November 2018**"
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