Optimal policy for macrofinancial stability gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, and eric r. It is therefore desirable that central banks also play a. Calibrating macroprudential policy to forecasts of financial stability. Louis alessandro rebucci interamerican development bank eric r. Optimal policy for macrofinancial stability new york fed. Financial crises reveal critical roles of nancial markets by inducing real economic disruptions. E44, g00, g01, g28 abstract this paper explores financial stability policies for the shadow banking system. Cgbs conference, june 56, 2014 the views expressed are those of the author and not necessarily those of the central bank of.
In this paper, we analyze the implications of macroprudential and monetary policies for business cycles, welfare, and financial stability. Apr 16, 2012 what the maths tells you is the following. Price stability, financial stability and efficiency, and. Detailed changes to the financial stability policy are included in attachment a. Overall, being responsible for monetary policy means that central banks have an intrinsic and deep interest in a stable financial system. Enhancing financial stability and resilience group of thirty.
We build a twosector dsge model to study reserve requirement adjustments, a frequentlyused policy tool for macro stabilization in china. These normative analyses build upon the concept of constrained efficient allocation, where the social planner is constrained by the same borrowing limit that agents face. Financial stability generally, and financial cycles in. Insurance industry perspective ravi rambarran ceo sagicor international garp caribbean global association of risk professionals may 2015. We consider a dynamic stochastic general equilibrium dsge model with housing and collateral constraints. Financial stability and optimal interestrate policy andrea ajello thomas laubach david l opezsalido taisuke nakata federal reserve board august 2016 abstract we study optimal interestrate policy in a. Suppose the optimal policy when a financial crisis is endogenous is expressed in the form of a modified price target like the one i have just.
Macroprudential policy frameworks macroprudential policy frameworks vary significantly across jurisdictions. Financial stability division, central bank of ireland, po box 11517, north wall quay, spencer dock, dublin 1. Loose fiscal policy, rising credit activity, and heightened risk. Financial stability and macroprudential policy were the missing pillars to ensure proper supervision of the financial system. Reserve requirements and optimal chinese stabilization policy 3 on average more productive than soes hsieh and klenow, 2009. This article discusses the establishment of the macro financial stability mfs section in the reserve bank and some of the potential financial instability issues new zealand. Thus, while i believe that, in most circumstances, the goals of monetary policy and financial stability are complementary, we need to recognize that, at times, actions taken to foster financial stability and. Gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, and eric r. Under such a situation, accompanied with a lack of room of the monetary policy, policy makers shed light on. The analysis of financial system distress via the ses method can be considered as a new tool of macro prudential policy which take into consideration all elements of the financial system and how they interact with each other and with the economy as a whole. Financial stability policies for shadow banking tobias adrian federal reserve bank of new york staff reports, no. Optimal policy for macrofinancial stability ideasrepec. Calibrating macroprudential policy to forecasts of. Young federal reserve bank of new york staff reports, no.
Optimal policy for macrofinancial stability gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, eric r. Hoenig president, federal reserve bank of kansas city. Optimal policy for macro financial stability gianluca benigno london school of economics huigang chen marketshare partners christopher otrok university of missouri federal reserve bank of st. Financial stability and optimal interestrate policy andrea ajello thomas laubach david l opezsalido taisuke nakata federal reserve board august 2016 abstract we study optimal interestrate policy in a new keynesian model in which the economy can experience nancial crises and the probability of a crisis depends on credit conditions. Thus, while i believe that, in most circumstances, the goals of monetary policy and financial stability are complementary, we need to recognize that, at times, actions taken to foster financial stability and those taken to promote our monetary policy goals might be in conflict, at least in the short run. Financial stability and optimal interestrate policy andrea ajello thomas laubach david l opezsalido taisuke nakata federal reserve board february 2015 abstract we study optimal interestrate policy in. Financial stability and optimal interestrate policy andrea ajello thomas laubach david l opezsalido taisuke nakata federal reserve board february 2015 abstract we study optimal interestrate policy in a new keynesian model in which the economy is at risk of experiencing a nancial crisis and the probability of a crisis depends on credit.
Earlier versions of this paper also circulated under the title optimal policy with occasionally binding credit constraints and optimal stabilization policy in a model with endogenous sudden stops. New framework for measuring and managing macrofinancial. Third and finally, we propose a computational algorithm to solve markovperfect optimal policy for problems in which the policy function is not differentiable. Then we solve for the optimal, timeconsistent macroprudential policy of a regulator. Marrying the micro and macroprudential dimensions of.
Alfi financial stability division, sama deputyship of research and international affairs. Macroprudential policy, tools, and systems for the future. Financial stability and optimal interestrate policy. Then we solve for the optimal, timeconsistent macroprudential policy of a regulator who cannot commit to future policies, and compute a statecontingent schedule of debt taxes that supports the optimal allocations as a competitive equilibrium. Insurance industry perspective ravi rambarran ceo sagicor international garp caribbean global association of risk professionals may. Under such a situation, accompanied with a lack of room of the monetary policy, policy makers shed light on the policy measures including macroprudential policy for nancial stability as a new frontier of the macro policy. Credit booms and macrofinancial stability request pdf. This debate revolves around the role of monetary and. Macro financial stability and macroprudential analysis pdf 98.
If however the policy maker has access to two instruments, it is optimal to act only during crisis times. New framework for measuring and managing macrofinancial risk and financial stability dale f. Reserve requirements and optimal chinese stabilization policy. Should not fiscal policy, too, be an essential part of the postcrisis macro financial stability framework. Arguably, the debate on the micro and macroprudential dimensions of financial stability is one such example.
Louis alessandro rebucci johns hopkins university cepr and nber eric r. Apr 07, 2011 in this context, numerous questions have arisen. Financial stability division, central bank of ireland, new wapping street, north wall quay, dublin 1. Literature on macroprudential policy appears not to be close to. Macroprudential policy and financial stability in the caribbean. Fy20082009 business planning parameters sections b1 through b10 were added. Optimal policy for macro financial stability, idb publications working papers 4202, interamerican development bank.
Suppose also that policy did tighten to head off the possibility of a crisis, and this led to lower output and inflation than would otherwise have. Optimal policy for macrofinancial stability gianluca benigno federal reserve bank of new york lse and cepr huigang chen uber technologies inc. For more information on the outlook see geoff bascands speech titled the reserve bank is renewing its approach to financial stability. Under such a situation, accompanied with a lack of room for monetary policy, policy makers shed light on policy measures including macroprudential policy for onancial stability as a new tool of macro economic policy. Financial policy tightening and credit growth capacity. A macroprudential approach to financial regulation aeaweb.
The reserve banks approach to financial stability is evolving and is becoming more intensive and more intrusive in terms of both regulation and supervision. This debate in advanced economies revolves around the role of macroeconomic and regulatory policies in causing the global crisis and how the conduct. Moreover, we examine if monetary policy and macroprudential regulation should jointly target non. Macro prudential supervision and financial stability reshma mahabir, ph. This study examines the challenges faced by central banks in implementing macroprudential policies, while having limited experience. Rethinking financial stability and macroprudential policy. In this paper, we show that the same set of policy tools that. We consider a dynamic stochastic general equilibrium dsge model. Suppose the optimal policy when a financial crisis is endogenous is expressed in the form of a modified price target like the one i have just described. Christopher otrok university of missouri federal reserve bank of st. Lane trinity college dublin and cepr august 2015 abstract this paper examines the cyclical behaviour of countrylevel macronancial variables under emu.
Under such a situation, accompanied with a lack of room for monetary policy, policy makers shed light on. Monetary policy in normal times in normal times the ecbs monetary policy strategy, in line with its definition of price stability, aims to keep inflation rates below, but close to, 2% over the medium term. Macroprudential supervision and financial stability reshma mahabir, ph. Optimal policy for macrofinancial stability gianluca benigno london school of economics huigang chen marketshare partners christopher otrok university of missouri federal reserve bank of st.
Financial stability, growth and macroprudential policy. Lopez federal reserve bank of san francisco abstract the introduction of macroprudential responsibilities at central banks and. Optimal policy for macro financial stability, working papers 2012041, federal reserve bank of st. Optimal policy for macro financial stability gianluca benigno federal reserve bank of new york lse and cepr huigang chen uber technologies inc. Further, i believe that the careful monitoring of the financial system now carried out by fed staff members, particularly those in the office of financial stability policy and research, and by the fsoc contributes to the stability of the u. The micro and macroprudential dimensions of financial stability promising discussions are often derailed by lack of precision in the definition of terms, when interlocutors think they share the same understanding but, in fact, do not. The report is defined as a policy that broadly promote security and stability of financial systems and payment mechanisms. Macroprudential policy and financial stability in the. Price stability, financial stability and efficiency, and monetary policy speech by lucas papademos, vice president of the ecb at the third conference of the monetary stability foundation on challenges to the financial system ageing and low growth frankfurt am main, 7 july 2006.
Macrofinancial stability and macroprudential analysis. The gains come from a higher nancial stability and a higher. It is therefore desirable that central banks also play a role in financial stability policies, both at the micro and macro levels. Global financial stability report international monetary fund. Economic fluctuations and growth, international finance and macroeconomics, monetary economics.
Macrofinancial stability and macroprudential analysis pdf 98. Calibrating macroprudential policy to forecasts of financial. Optimal policy for macrofinancial stability federal reserve. Federal reserve board macroprudential policy in the u.
Financial stability and sustainability under the coordination. Macroprudential policy and financial stability 83 83 inflation, the need to take into account the behavior of asset prices in setting monetary policy. Five points about monetary policy and financial stability. Should not fiscal policy, too, be an essential part of the postcrisis macrofinancial stability framework. Lopez federal reserve bank of san francisco abstract the introduction of. Price stability, financial stability and efficiency, and monetary policy speech by lucas papademos, vice president of the ecb at the third conference of the monetary stability foundation on.
Yet history shows that financial crises wreak havoc with public finances. Even when set optimally from a microprudential perspective, capital. The analysis of financial system distress via the ses method can be considered as a new tool of macroprudential policy which take into consideration all elements of the. The reserve banks approach to financial stability is evolving and is becoming more intensive and more intrusive in terms of both regulation and.
Towards a financial stabilityoriented fiscal policy. New framework for measuring and managing macrofinancial risk. Other sources appear more behavioral, for example, when investors chase similar. Hsieh and song, 2015, holding all else equal, this. Then we solve for the optimal, timeconsistent macroprudential policy of a regulator who cannot commit to future policies, and compute a statecontingent schedule of debt. Evidence on central banks twin objective, monetary and financial stability, is scarce. There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. We suggest an integrated micromacro approach with two core virtues. International finance and macroeconomics, monetary economics. What was the role of monetary policy and financial regulation in contributing to vulnerabilities. Financial stability generally, and financial cycles in particular, hardly feature in the design of fiscal policy.
Citeseerx optimal policy for macrofinancial stability. Monetary union strengthened the covariation pattern between the output cycle and the nancial cycle, while macronancial policies at. Calibrating macroprudential policy to forecasts of financial stability scott a. Attachment b is the revised financial stability policy. Monetary policy alone cannot be expected to achieve financial stability effectively or. What are the lessons from the crisis for the design of macro prudential policies and regulations. Further, i believe that the careful monitoring of the financial system now carried out by fed staff members, particularly those in the office of financial stability policy and research, and by the fsoc. Macroprudential supervision and financial stability. How can monetary policy be adapted to achieve greater financial stability. Cgbs conference, june 56, 2014 the views expressed are those of the author and not necessarily those of the central bank of trinidad and. Monetary policy in normal times in normal times the ecbs monetary policy strategy, in line with its definition of price. The macroprudential policy is associated with the regulation and supervision.
There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing. Crockett jpmorgan chase international, stefan ingves sveriges riksbank. Macro prudential policy and financial stability in the caribbean. Monetary policy, fiscal policy and financial stability. How does household debt affect macroeconomic and financial stability. Financial crises reveal critical roles of onancial markets by inducing real economic disruptions. How to deal with credit booms giovanni dellariccia, deniz igan, luc laeven, and hui tong, with bas bakker and jerome vandenbussche i n t e r n a t i o n a l m o n e t a r y f u n d.
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