Countercyclical Macro Prudential Policies in a Supporting Role to Monetary Policy
IMF Working Papers, November 1, 2009
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Bibliographic details
- Authors: Papa M N'Diaye
- Published: November 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451874037.001
Summary and Research Question
- Explores how prudential regulations can support monetary policy in reducing output fluctuations while maintaining financial stability.
- Uses a new framework that blends a standard model for monetary policy analysis with a contingent claims model of financial sector vulnerabilities.
- Investigates whether binding countercyclical prudential regulations can reduce output fluctuations and lessen the risk of financial instability.
Framework and Methodology
- Combines:
- a standard model for monetary policy analysis, and
- a contingent claims model of financial sector vulnerabilities.
- Focuses on the role of countercyclical prudential rules (for example, countercyclical capital adequacy rules) in interacting with monetary policy and asset-price dynamics.
Key Findings
- Binding countercyclical prudential regulations can help reduce output fluctuations.
- Countercyclical rules can lessen the risk of financial instability.
- Countercyclical capital adequacy rules can allow monetary authorities to achieve the same output and inflation objectives but with smaller adjustments in interest rates.
- Countercyclical rules can:
- help stem swings in asset prices,
- lean against a financial accelerator process,
- help lower risks of macroeconomic and financial instability.
- In economies with fixed exchange rates, where countercyclical monetary policy is not possible, prudential regulations can provide a useful mechanism for mitigating a run-up in asset prices and for promoting output stability.
Policy Implications and Recommendations
- Implement binding countercyclical prudential regulations, such as countercyclical capital adequacy rules, to support monetary policy objectives.
- Use prudential regulations as a policy tool to:
- reduce the need for large interest rate adjustments,
- stabilize asset prices,
- mitigate financial accelerator effects.
- In fixed exchange rate regimes, rely more on prudential regulations to manage asset-price run-ups and promote output stability when monetary policy cannot be countercyclical.
Publication and Metadata
- Author: Papa M N'Diaye
- Date: November 1, 2009
- Series: Working Paper No. 2009/257
- Issue: 257
- Volume: 2009
- Pages: 22
- DOI: https://doi.org/10.5089/9781451874037.001
- Stock No: WPIEA2009257
- ISBN: 9781451874037
- ISSN: 1018-5941
- Citation preview (format: Chicago): Papa M N'Diaye. "Countercyclical Macro Prudential Policies in a Supporting Role to Monetary Policy", IMF Working Papers 2009, 257 (2009), accessed 9/17/2026, https://doi.org/10.5089/9781451874037.001
IMF Working Paper summary authored by Papa M N'Diaye.