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

December 29, 2015

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Format: Chicago

Itai Agur, and Maria Demertzis. Will Macroprudential Policy Counteract Monetary Policy’s Effects on Financial Stability?, (USA: International Monetary Fund, 2015) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

How does monetary policy impact upon macroprudential regulation? This paper models monetary policy's transmission to bank risk taking, and its interaction with a regulator's optimization problem. The regulator uses its macroprudential tool, a leverage ratio, to maintain financial stability, while taking account of the impact on credit provision. A change in the monetary policy rate tilts the regulator's entire trade-off. We show that the regulator allows interest rate changes to partly "pass through" to bank soundness by not neutralizing the risk-taking channel of monetary policy. Thus, monetary policy affects financial stability, even in the presence of macroprudential regulation.

Subject: 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

Publication Details

Pages:

23
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/283
Stock No:

WPIEA2015283
ISBN:

9781513545332
ISSN:

1018-5941

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