In the quest of macroprudential policy tools

Samano, Daniel (2011): In the quest of macroprudential policy tools.

Abstract

The global financial crisis of late 2008 could not have provided more convincing evidence that price stability is not a sufficient condition for financial stability. In order to attain both, central banks must develop macroprudential instruments in order to prevent the occurrence of systemic risk episodes. For this reason testing the effectiveness of different macroprudential tools and their interaction with monetary policy is crucial. In this paper we explore whether two policy instruments, namely, a capital adequacy ratio (CAR) rule in combination with a Taylor rule may provide a better macroeconomic outcome than a Taylor rule alone. We conduct our analysis by appending a macroeconometric financial block to an otherwise standard semistructural small open economy neokeynesian model for policy analysis estimated for the Mexican economy. Our results show that with the inclusion of the second policy instrument the central bank can obtain substantial gains. Moreover, we find that when the CAR rule is adequately designed the central authority can mitigate output gap shocks of twice the variance than the Taylor rule alone scenario. Thus, under this two rule case the central authority can isolate financial shocks and dampen their effects over macroeconomic variables.

• Item Type: MPRA Paper
• Language: English
• Keywords: macroprudential tools; macroprudential policy; capital adequacy ratio; Taylor rule
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

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