Optimal Monetary and Prudential Policies
- Collard, Fabrice Department of Economics, University of Bern, Schanzeneckstrasse 1, CH-3012 Bern, Switzerland, and CEPR (e-mail: )
- Dellas, Harris Department of Economics, University of Bern, Schanzeneckstrasse 1, CH-3012 Bern, Switzerland, and CEPR (e-mail: )
- Diba, Behzad Department of Economics, Georgetown University, Intercultural Center 580, 37th and O Streets, N.W., Washington, DC 20057 (e-mail: )
- Loisel, Olivier CREST (ENSAE), 15 boulevard Gabriel Péri, 92245 Malkoff Cédex, France (e-mail: )
Published in:
- American Economic Journal: Macroeconomics. - American Economic Association. - 2017, vol. 9, no. 1, p. 40-87
English
The recent financial crisis has highlighted the interconnectedness between macroeconomic and financial stability, raising questions about how to combine monetary and prudential policies. This paper characterizes the jointly optimal monetary and prudential policies, setting the interest rate and bank-capital requirements. The source of financial fragility is the socially excessive risk taking by banks due to limited liability and deposit insurance. We provide conditions under which locally (Ramsey) optimal policy dedicates the prudential instrument to preventing inefficient risk taking by banks, and the monetary instrument to dealing with the business cycle, with the two instruments covarying either negatively, or positively and countercyclically. (JEL E32, E43, E44, E52, G01, G21, G28)
- Language
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- English
- Open access status
- green
- Identifiers
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- DOI 10.1257/mac.20140139
- ISSN 1945-7707
- Persistent URL
- https://sonar.ch/global/documents/234611
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