The Relationship Between Monetary and Macroprudential Policies
This paper analyzes the interaction between monetary and
macroprudential policies mainly in the context of the non-cooperation
among policy authorities. Each policy authority’s optimal response is
to tighten its policy measures when other authorities’ policy measures
are loosened. This indicates that the two policies are substitutes for
each other. This result still holds when an additional financial stability
mandate is assigned to the central bank. The condition for the
response functions to converge to a Nash equilibrium state is analyzed
along with the speed of convergence, showing that they depend on the
authorities’ preferences and the number of mandates assigned to
policy authorities. If the financial supervisory authority (FSA) assigns
greater importance to the output gap or a stronger financial stability
mandate is assigned to the central bank (CB), the probability of nonconvergence
increases and the speed of convergence declines even
when the condition of convergence is satisfied. Meanwhile, if the CB
considers output stability as an important task, the probability of
convergence and the speed of converging to a state of equilibrium are
high. Finally, when a single mandate or small number of mandates
is/are assigned to each authority, stability is more quickly restored as
compared to when many mandates are assigned.
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