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Optimal Monetary Policy, Macroprudential Instruments, and the Credit Cycle
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Economics.
2019 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

I study optimal monetary and macroprudential policies in a New Keynesian DSGE framework with leverageconstrainedbanks. In particular, I assess the desirability of alternative operational policy rules when theeconomy is hit by mortgage default shocks and show that their implications for inflation dynamics and policytrade-offs depend on whether the shocks originate in the household sector or in the entrepreneurial sector ofthe economy. Moreover, I find that the strategy of ‘leaning against the wind’ (LAW) of credit growth deliverssystematically poorer stabilization outcomes than standard flexible inflation-targeting when there exists anon-trivial trade-off between stabilizing output and inflation, but outperforms conventional monetary policyfor shocks that generate a comovement between the two, irrespective of the real or financial nature of theshock.I show that optimal macroprudential regulation that is as concerned with output as monetary policy candrastically reduce, and in many cases completely eliminate, the incentive to lean against the wind. I arguethat this is due to the ability of full-fledged optimal macroprudential policy to break the favourable complementaritybetween stabilizing credit growth and stabilizing output growth which underlies the incentive tolean against the wind. Macroprudential policy proves a superior substitute to LAW because it can achieve thesame financial stability objectives without systematically imposing costs in terms of price stability.

Place, publisher, year, edition, pages
2019. , p. 44
Keywords [en]
Monetary policy, macroprudential regulation, banking, financial frictions
National Category
Economics
Identifiers
URN: urn:nbn:se:uu:diva-388488OAI: oai:DiVA.org:uu-388488DiVA, id: diva2:1333385
Subject / course
Economics
Educational program
Master Programme in Economics
Supervisors
Available from: 2019-07-01 Created: 2019-07-01 Last updated: 2019-07-01Bibliographically approved

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CiteExportLink to record
Permanent link

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Citation style
  • apa
  • ieee
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  • vancouver
  • Other style
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Language
  • de-DE
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  • en-US
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  • Other locale
More languages
Output format
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