When Could Macroprudential and Monetary Policies Be in Conflict?

Jose Garcia Revelo and Grégory Levieuge

Abstract: This paper aims to provide a comprehensive analysis of the potential conflicts between macroprudential and monetary policies within a DGSE model with financial frictions. The identification of conflicts is conditional on different types of shocks, policy instruments, and policy objectives. We first find that conflicts are not systematic but are fairly frequent, especially in the case of supply-side and widespread shocks such as investment efficiency and bank capital shocks. Second, monetary policy and countercyclical capital requirements generate conflicts in many circumstances. By affecting interest rates, they both “get in all the cracks”, albeit with their respective targets generally moving in opposite directions. Nonetheless, monetary policy could reduce its adverse financial side effects by responding strongly to the output gap. Third, countercyclical loan-to-value caps, as sector-specific instruments, cause fewer conflicts. Thus, they can be more easily implemented without concerns about generating spillovers, whereas smooth coordination is required between state-contingent capital requirements and monetary policy.

Keywords: Macroprudential Policy; Loan-to-Value; Countercyclical Buffer; Monetary Policy; Conflicts; DSGE Model (search for similar items in EconPapers)
JEL-codes: E44 E58 E61 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2022
New Economics Papers: this item is included in nep-cba, nep-dem, nep-dge, nep-fdg, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: When could Macroprudential and Monetary Policies be in Conflict? (2022)
Working Paper: When could Macroprudential and Monetary Policies be in Conflict? (2022)
Working Paper: When could macroprudential and monetary policies be in conflict? (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:871

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