Macroprudential supervision seeks to ensure financial stability by limiting disruptions to financial services caused by an impairment of all or parts of the financial system and and which have the potential to have serious negative consequences for the real economy. The optimal policy requires, in general, a mix of expost. Gianluca benigno, london school of economics discussant. He argues that monetary policy should be conducted taking the macroprudential policy into account, and vice versa, as in a nash equilibrium rather than a coordinated equilibrium. Toward stability and efficiency improvement of financial. Globalization and monetary policy institute working paper no. Should not fiscal policy, too, be an essential part of the postcrisis macrofinancial stability framework. Institute for monetary and financial stability, goethe university frankfurt. The surprising origin and nature of financial crises. He has publications on various topics such as extracting information from financial asset prices, monetary policy rules, central bank governance, foreign currency lending and. Optimal policy for macro financial stability, working papers 2012041, federal reserve bank of st. At the onset of the financial crisis, he joined the mnbs financial stability department where he was responsible for macro stresstesting and forecasting. Bailouts, capital controls, exchange rate policy, financial frictions, financial crises, macro financial stability, macro prudential policies.
Rethinking financial stability and macroprudential policy. Speech at the rethinking macroeconomic policy iv conference, peterson institute for international economics, washington, dc, 12 october 2017. Optimal policy for macrofinancial stability federal reserve bank. Economic fluctuations and growth, international finance and macroeconomics, monetary economics. Apr 16, 2012 suppose the optimal policy when a financial crisis is endogenous is expressed in the form of a modified price target like the one i have just described. Alberto cavallo gita gopinath brent neiman jenny tang. Christopher otrok university of missouri, missouri mizzou. The course then examines the challenges to monetary and fiscal policy that arise because of macro financial linkages. Importantly, macroprudential policies are intended to work hand in hand with monetary policy, which cannot by itself simultaneously ensure both monetary and financial stability. Suppose the optimal policy when a financial crisis is endogenous is expressed in the form of a modified price target like the one i have just described.
It concerns fiscal and monetary policies, trade and investment flows and political developments on a national and international scale, and the effects of these factors on financial portfolios and company valuations. Toward stability and efficiency improvement of financial and economic systems. Optimal policy for macrofinancial stability ideasrepec. Collateral constraints and the case for macroprudential policy. Course descriptions advanced academic programs johns. Our group is actively engaged in the development of mathematical models of largescale financial systems with the goal of providing quantitative insights on financial stability and systemic risk to regulators and policy makers. The course then examines the challenges to monetary and fiscal policy that arise because of macrofinancial linkages. Gianluca benigno the london school of economics and. Optimal policy for macro financial stability, idb publications working papers 4202, interamerican development bank.
There is a new and now extensive literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. In monetary policy, the goal is for inflation to be stable and close enough to the target. A primer on financial markets modeling in open economy models and fundamentals of macro models of financial crises. Young federal reserve bank of new york staff reports paper.
Economic fluctuations and growth, international finance and macroeconomics, monetary economics there is a new and now extensive literature analyzing government policies for financial stability. Federal reserve bank of new york, london school of economics, center for. Friedman institute macro financial modeling and macroeconomic fragility conference, cambridge, ma, october 20. Optimal policy for macrofinancial stability, idb publications working papers 4202, interamerican development bank. Optimal policy for macro financial stability by gianluca benigno, huigang chen, christopher otrok, alessandro rebucci and eric r. Optimal policy for macrofinancial stability, working papers 2012041, federal reserve bank of st. Overall, being responsible for monetary policy means that central banks have an intrinsic and deep interest in a stable financial system. Costbenefit analyses should be factored into the rulemaking process. The global financial crisis opened a heated debate on whether inflation target regimes must be relaxed and allow for monetary policy to address financial stability concerns. Perspective of macro policy mix and financial markets. Optimal policy for macro financial stability gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, eric r.
Optimal policy for macrofinancial stability federal reserve. Yet the addition of financial stability responsibilities to central banks mandates significantly complicates decisionmaking. Optimal policy for macrofinancial stability by gianluca. Optimal policy for macrofinancial stability gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, eric r. Svensson 2012 suggests that monetary policy should be in charge of price stability while macroprudential policy needs to address financial stability. This view is best described by stein 20, who says that supervisory and. Cep discussion paper no 1172 october 2012 optimal policy for macro financial stability gianluca benigno, huigang chen, chris otrok, alessandro rebucci, eric young 2012. An increasingly visible school of heterodox macroeconomics, modern monetary theory mmt, makes the case for functional financethe view that governments should set their fiscal position at whatever level is consistent with price stability and full employment, regardless of current debt or deficits.
Joseph, d16, and rosaline wolf award for best dissertation 2010. There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. The views expressed in this paper are those of the authors and should not. Optimal policy for macro financial stability, research department publications 4818, interamerican development bank, research department. Financial stability and optimal interestrate policy. While these papers consider the role of capital controls as an instrument of monetary policy, usually under a xed exchange rate regime, they do not address the role of capital controls in fostering nancial stability. Dsge model with occasionally binding financial friction. There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing. We show that a secondorder approximation of social wel fare includes terms for credit, in addition to terms. Monetary policy in a new era brookings institution.
Spillovers and the optimal design of macroprudential. Towards a financial stabilityoriented fiscal policy. It is, therefore, safe to say that macroprudential regulation compliments microprudential regulation in providing an optimal path to financial sector stability. The bank policy institute bpi is a nonpartisan public policy, research and advocacy group, representing the nations leading banks. Policy coordination in promoting financial stability.
There are two reasons why it is important that the central bank remains alert to financial stability issues, even though its primary objective will remain to secure price stability. Policies for macroeconomic and financial stability, annual international journal of central banking. With such policies, they seek to strengthen the financial system and lessen the negative externalities on the real sector e. Financial shocks, financial stability, and optimal taylor. Macroeconomic risk macroeconomic risk derives from the behaviour of industries and governments and the relationships between them rather than from individual companies. New methods for macrofinancial model comparison and. Optimal policy for macrofinancial stability, research department publications 4818, interamerican development bank, research department. Financial stability generally, and financial cycles in particular, hardly feature in the design of fiscal policy. Nina biljanovska is an economist at the macrofinancial division of the research department. To reveal a policy mandate for financial stability, we introduce a frictional credit market with a search and matching process into a standard new keynesian model with nominal rigidities in the goods market, and then investigate optimal policy under financial frictions. Macroprudential supervision and financial stability. Financial stability and optimal interestrate policy andrea ajello thomas laubach david l opezsalido taisuke nakata federal reserve board august 2016 abstract we study optimal interestrate policy in a new keynesian model in which the economy can experience nancial crises and the probability of a crisis depends on credit conditions. Should not fiscal policy, too, be an essential part of the postcrisis macro financial stability framework. Suppose also that policy did tighten to head off the possibility of a crisis, and this led to lower output and.
Monetary policy mainly works through its ability to affect current and expected future interest rates. Further, a number of analytical tools for assessing financial stability and vulnerabilities to macro shocks are presented. Suppose also that policy did tighten to head off the possibility of a crisis, and this led to lower output and inflation than would otherwise have occurred. Optimal policy analysis in a new keynesian economy with. Five points about monetary policy and financial stability. Calibrating macroprudential policy to forecasts of financial. Tetsuya inoue general manager, financial technology and market research department, nomura research institute abstract throughout its whole process, the global financial crisis that broke out in 2007 threw. Bailouts, capital controls, exchange rate policy, financial frictions, financial crises, macrofinancial stability, macroprudential policies. Optimal policy for macro financial stability, 20 meeting papers 636, society for economic dynamics. Monetary policy and financial stability under one roof. New research paper theory of optimum financial areas. The new role of central banks bank for international. Calibrating macroprudential policy to forecasts of. The analysis includes optimal policy with and without commitment i.
Thus, the assessment of whether the goal has been achieved is relatively straightforward. Nina biljanovska is an economist at the macro financial division of the research department. Macroprudential policy targets include but are not limited to appropriate loss adsorption buffers and credit growth, may include leaning against asset price bubbles or reversals. We also analyze the effects of bailouts on financial stability and welfare in the absence of exante prudential policy. Monetary policy, macroprudential policy, and financial stability vox. Bailouts, capital controls, exchange rate policy, financial frictions, financial crises, macro.
With a closeto optimal macro prudential framework in place, should monetary policy leave financial stability out of sight. Optimal policy for macrofinancial stability, 20 meeting papers 636, society for economic dynamics. Risks to financial stability come from a wide range of sources, both external new zealands financial system is heavily reliant on external funding, which makes us vulnerable to dislocation in overseas funding markets and domestic for example risks related to lending to our dairy industry and to our already highly indebted households. House of finance, theodoradornoplatz 3, d60629 frankfurt, germany. Macro stability and welfare under optimal policy benchmark open flex fx full reform capital account. This paper develops an open economy model in which financial intermediation is subject to occasionally binding collateral constraints, and uses the model to study unconventional policies such as credit facilities and foreign exchange intervention. The resumption of capital flows to emerging market economies since mid 2009 has posed two sets of interrelated challenges for policymakers.
Christopher otrok university of missouri, missouri. This course studies macroprudential policy in quantitative dynamic general equilibrium models with collateral constraints, covering theoretical foundations, optimal policy design and evaluation, and implementation hurdles. Citations of overborrowing, financial crises and macro. Bernanke brookings institution october 2, 2017 prepared for conference on rethinking macroeconomic policy, peterson institute, washington. With a closetooptimal macroprudential framework in place, should monetary policy leave financial stability out of sight.
Caballero professor, massachusetts institute of technology. Capital controls as an instrument of monetary policy. Optimal monetary policy in production networks with jennifer lao. Retooling the debate on the governance of global finance share this page work has now been completed on a swift institute research grant that examines the institutional preconditions for stable financial integration in a.
Better macrofinancial models can improve the tools available to policy makerssuch as central banks, which now include financial stability among their priorities and are considering pursuing macroprudential policies. Mainstream macroeconomics and modern monetary theory. Monetary policy, macroprudential policy, and financial stability. This research using qualitative data collected among a sample of 44 cyber security professionals from 28 financial sector organizations in 5 geographies describes the measures enabling cyberresilience in the financial sector. Moreover, even in the presence of a risktaking channel of monetary policy that creates an effect of monetary policy on financial stability, optimal policy can still be implemented by assigning a financialstability mandate to the macroprudential authority and a macroeconomicstability mandate to the monetary authority see e.
Nonetheless, this debate has focused on the ability of the interest rate to lean against the wind and, more generally, on the accumulation of systemic risk arising from the macro financial challenges faced by advanced. Develop a framework to study the optimal stabilization problem before and during financial crises. To address these policy objectives without a better understanding of macrofinance linkages is like shooting in the dark. The model highlights the interaction between the real exchange rate, interest rates, and financial frictions. Retooling the debate on the governance of global finance share this page work has now been completed on a swift institute research grant that examines the institutional preconditions for stable financial integration in a theory of optimal financial areas ofa. Feb 21, 2019 better macrofinancial models can improve the tools available to policy makerssuch as central banks, which now include financial stability among their priorities and are considering pursuing macroprudential policies. Previously she worked in the institute for capacity development and on the brazil and ecuador teams in the western hemisphere department. Moreover, even in the presence of a risktaking channel of monetary policy that creates an effect of monetary policy on financial stability, optimal policy can still be implemented by assigning a financial stability mandate to the macroprudential authority and a macroeconomic stability mandate to the monetary authority see e. It is therefore desirable that central banks also play a role in financial stability policies, both at the micro and macro levels. Economic fluctuations and growth, international finance and macroeconomics, monetary economics there is a new and now extensive literature analyzing government policies for financial.
Under alternative plausible assumptions regarding the value of key parameters, the optimal policy can call for larger adjustments to the policy rate than in a situation without nancial stability concerns. Jim nason, federal reserve bank of philadelphia discussant. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. Yet history shows that financial crises wreak havoc with public finances.
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