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Disinflation Costs and Macroprudential Policies: Real and Welfare Effects

Busato, Francesco and Ferrara, Maria and Varlese, Monica (2022): Disinflation Costs and Macroprudential Policies: Real and Welfare Effects.

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This paper investigates the costs of disinflation in an otherwise standard DSGE model with borrowing constraints and credit frictions, augmented with macroprudential authority. Analyzing the real and welfare effects of a permanent change in the inflation rate, we study the role of macroprudential policy and its interaction with monetary policy in ensuring financial stability. Results show that when macroprudential authority intervenes actively in order to improve financial stability, disinflation costs are limited. As for the welfare effects, disinflation is welfare improving for savers but welfare costly for borrowers and banks.

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