Optimal policy for macrofinancial stability, research department publications 4818, interamerican development bank, research department. The traditional conceptual framework of money and price dynamics, however, has not kept up with the expanding concept of money. In this regard, the definition of money can be broadened to equal liquidity. Calibrating macroprudential policy to forecasts of financial stability scott a. Optimal policy for macro financial stability gianluca benigno london school of economics huigang chen marketshare partners christopher otrok university of missouri federal reserve bank of st. Optimal policy for macrofinancial stability, cepr discussion papers 9223, c. For example, there are no futures markets, and thus no marketbased expectations, for the unemployment rate. Monetary policy is profoundly affected by financial disruption, since important channels of transmission are interrupted. Third and finally, the paper proposes a computational algorithm to solve markovperfect optimal policy for problems in which the policy. Optimal policy for macrofinancial stability federal. Fluctuations in the current account of the balance of payments.
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. Nber papers on international finance and macroeconomics program. Under such a situation, accompanied with a lack of room of the monetary policy, policy makers shed light on the policy measures including macroprudential policy for nancial stability as a new frontier of the macro policy. Economic fluctuations and growth, international finance and macroeconomics, monetary economics there is a new and now extensive literature analyzing government policies for financial stability. Macro stability can be measured by the volatility of key indicators. Central bank independence and macroprudential regulation. In a report titled macro prudential issues related to financial innovation for the period 198090. E61, f38, f44, h23 abstract there is a new and now large literature analyzing government policies for financial stability. Earlier versions of this paper also circulated under the title optimal policy with occasionally binding credit constraints and optimal stabilization policy. Optimal policy for macrofinancial stability, nber working papers 26397, national bureau of economic research, inc.
Optimal policy for macro financial stability gianluca benigno federal reserve bank of new york lse and cepr huigang chen uber technologies inc. Macroeconomic risk macroeconomic risk derives from the behaviour of industries and governments and the relationships between them rather than from individual companies. 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. Macro prudential supervision and financial stability reshma mahabir, ph. Cgbs conference, june 56, 2014 the views expressed are those of the author and not necessarily those of the central bank of. Regular financial stability assessment and the identification of macroprudential leading indicators signaling coming risks to the banking system are of major importance for central banks and supervisory authorities. Calibrating macroprudential policy to forecasts of financial. Candidates are evaluated based on their research records and. The empirical results obtained show that disciplined fiscal and accommodative monetary policies stance is optimal for financial sector stability. A safe and sound banking system ensures the optimal allocation of capital resources, and regulators therefore aim.
Cgbs conference, june 56, 2014 the views expressed are those of the author and not necessarily those of the central bank of trinidad and. The emergence of possible systemic risks in the financial system is addressed through macroprudential policies. Financial sector regulation is not effective to reduce alreadypiledup nominal debt. Optimal policy for macro financial stability by gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, eric r. Citeseerx optimal policy for macrofinancial stability. Optimal policy for macrofinancial stability by gianluca.
Optimal policy for macrofinancial stability fed in print. In this paper we study whether policy makers should wait to intervene until a financial. Financial stability generally, and financial cycles in particular, hardly feature in the design of fiscal policy. Dong he hong kong monetary authority and hong kong institute for monetary research this article summarizes the characteristics of hong kongs approach to. Young there is a new and now large literature analyzing government policies for financial stability. Macro in the context of hedge funds, a style of management that takes longterm strategic bets. This paper studies whether policymakers should wait to intervene until a financial. Bailouts, capital controls, exchange rate policy, financial crises, financial frictions, macro financial stability, macro prudential policies. This question is examined in a relatively simple dynamic. This study examines the challenges faced by central banks in implementing macroprudential policies, while having limited experience. Our definition thus focuses on changes to the shape of the lower tail that are not already captured by our definition of macroeconomic stability risk. Then we solve for the optimal, timeconsistent macroprudential policy of a regulator who cannot commit to future policies, and compute a statecontingent schedule of debt taxes that supports the optimal allocations as a competitive equilibrium. 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. Tsomocos3 14 february, 2006 abstract as financial stability has gained focus in economic policymaking, the demand for analyses of financial stability and the consequences of economic policy has increased.
This paper studies whether policymakers should wait to intervene until a financial crisis strikes or rather act in a preemptive manner. The term macroeconomic stability describes a policy prescription that prepares an economy for growth by buffering it against external shocks. Optimal policy for macrofinancial stability, working papers 2012041, federal reserve bank of st. Fiscal policy as well is usually strained in such circumstances, requiring significant effort to restore macroeconomic equilibrium. The book uses economic theory, finance, mathematical modelling, risk theory, and policy to posit a comprehensive, coherent and current economic analysis of the inherent instabilities of the financial system, and the design of optimal policy response. Financial stability and macroeconomic models request pdf. The interaction of monetary and macroprudential policies the interaction of monetary and macroprudential policies executive summary the recent crisis showed that price stability does not guarantee macroeconomic stability. Third and finally, we propose a computational algorithm to solve markovperfect optimal policy for problems in which the policy function is not differentiable. By gianluca benigno, huigang chen, chris otrok, alessandro rebucci and eric young. The report is defined as a policy that broadly promote security and stability of financial systems and payment mechanisms.
Sep 07, 2018 the macro financial literature since the crisis of 2008 has brought to light that three stylized facts should be considered by monetary policy makers. Monetarist economists believe that monetary policy is a more powerful weapon than fiscal policy in controlling inflation. Monetary policy and economic policy scientific papers. Should not fiscal policy, too, be an essential part of the postcrisis macro financial stability framework. Towards a financial stabilityoriented fiscal policy. Gianluca benigno, huigang chen, christopher otrok, alessandro rebucci and eric young. These normative analyses build upon the concept of constrained efficient allocation, where the social planner is constrained by the same borrowing limit that agents face. Optimal policy for macrofinancial stability working. The paper on financial stability, economic growth, inflation and monetary policy linkages in india.
Yet history shows that financial crises wreak havoc with public finances. Nevertheless, at functional level, the macroprudential policy focuses to strengthen the resilience of financial system and dampen the financial. Monetary policy, financial conditions, and financial stability. Capital controls, capital flows, exchange rate policy, financial frictions, financial crises, macro financial stability, prudential policies. Then we solve for the optimal, timeconsistent macroprudential policy of a regulator who cannot commit to future policies, and compute a statecontingent schedule of. Optimal policy for macro financial stability gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, and eric r. There is a new and now extensive literature analyzing government policies for financial stability. Louis alessandro rebucci interamerican development bank eric r. Pdf financial stability, economic growth, inflation and. Optimal policy for macrofinancial stability, 20 meeting papers 636, society for economic dynamics. In the aftermath of the late2000s financial crisis. There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. Optimal monetary and macroprudential policy in a currency.
Optimal policy for macrofinancial stability ebook, 2019. In this paper we study whether policy makers should wait to intervene until a fi financial crisis strikes or rather act in a preemptive manner. Nber researchers new nber affiliates are appointed through a highly competitive process that begins with a call for nominations in january. It starts with an introduction to the macroeconomic policy. Macroprudential supervision and financial stability. Financial stability and optimal interestrate policy.
This study derives an optimal macroeconomic policy combination for financial sector stability in the united kingdom by employing a new keynesian dynamic stochastic general equilibrium nkdsge framework. Macroprudential regulation is the approach to financial regulation that aims to mitigate risk to the financial system as a whole or systemic risk. In this paper we study whether policy makers should wait to intervene until a financial crisis strikes or rather act in a. Young federal reserve bank of new york staff reports, no. Monetary policy also involves changes in the value of the exchange rate since fluctuations in the currency also impact on macroeconomic. Financial stability risk is then defined as the distance of gdp at risk from the expected median gdp growth. For a monetary policymaker with a dual mandate for both price stability and maximum employmentlike the federal reservemonetary policy cannot rely only on marketbased expectations, since none exist for a key macroeconomic. Bailouts, capital controls, exchange rate policy, financial frictions, financial crises, macro financial stability, macro prudential policies.
A central bank in charge of both price and financial stability faces a time inconsistency problem. Optimal policy for macrofinancial stability request pdf. Under such a situation, accompanied with a lack of room for monetary policy, policy makers shed light on policy measures including macroprudential policy for onancial stability as a new tool of macro economic policy. Candidates are evaluated based on their research records and their capacity to contribute to the nbers activities by program directors and steering committees. Alternative policy paths using historical examples illustrate the usefulness of the proposed policy rule. There is a new and now large literature analyzing government policies for financial stability. Optimal policy is fairly well approximated by a flexible targeting rule, which stabilizes a basket composed of domestic price inflation, exchange. The mandate of macroprudential policy maintaining financial stability is too broad to have a uniform definition or single measurable indicator.
Then we characterize and solve for the optimal, timeconsistent macroprudential policy of a nancial regulator who lacks the ability to commit to future. Macro prudential analysis focuses on factors that may threaten the stability of the financial system and the interrelationship between macroeconomic and financial stability. Financial stability can be defined as a condition in which the financial system which comprises financial. How to manage macroeconomic and financial stability risks. Today i will focus on one piece of the current debate, bank capital and credit to borrowers, and its links to macroeconomic. Nevertheless, at functional level, the macroprudential policy focuses to strengthen the resilience of financial system and dampen the financial cycle caruna and cohen, 2014. Optimal policy for macrofinancial stability gianluca. Hoenig president, federal reserve bank of kansas city. Gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, and eric r. National bureau of economic research, there is a new and now extensive literature analyzing government policies for financial stability. An empirical reflection by sarat dhal, purnendu kumar and jugnu ansari provides an. By gianluca benigno, huigang chen, christopher otrok, alessandro rebucci and eric r. Apr, 2015 for example, there are no futures markets, and thus no marketbased expectations, for the unemployment rate. Apr 16, 2012 what the maths tells you is the following.
In this paper, we show that the same set of policy. For a monetary policymaker with a dual mandate for both price stability and maximum employmentlike the federal reservemonetary policy cannot rely only on marketbased expectations, since none exist for a key macroeconomic variable. In the aftermath of the late2000s financial crisis, there is a growing consensus among policymakers and economic researchers about the need to reorient the regulatory framework towards a macroprudential perspective. A stabilization policy is a macroeconomic strategy enacted by governments and central banks to keep economic growth stable, along with price levels and unemployment. No 899, staff reports from federal reserve bank of new york abstract. But, monetary policy can create inflation expost to reduce the private sectors real debt burden.
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. It is therefore desirable that central banks also play a role in financial stability policies, both at the micro and macro levels. Monetary policy in normal times in normal times the ecbs monetary policy strategy, in line with its definition of price stability, aims to keep inflation rates below, but close to, 2% over the medium term. Monetary policy, fiscal policy and financial stability. 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. In trying to identify the main factors affecting financial stability. Financial stability and macroprudential policy were the missing pillars to ensure proper supervision of the financial system. By gianluca benigno, huigang chen, christopher otrok, alessandro rebucci and eric young.
A stabilization policy is a macroeconomic strategy enacted by governments and central banks to keep economic growth stable, along with price levels and. Young there is a new and now extensive literature analyzing government policies for financial stability. The macro financial analysis mfa section supports the monetary policy and financial stability mandates of the board through policy analysis and longerterm research on. Consumer price inflation annual % change in prices real gdp growth over one or more business cycles.
Financial crises reveal critical roles of nancial markets by inducing real economic disruptions. Evaluation of macroeconomic models for financial stability. This question is examined in a relatively simple dynamic stochastic general equilibrium model in which crises are endogenous events induced by the presence of an occasionally binding borrowing constraint as in mendoza 2010. Simulations show that optimal policy significantly increases welfare relative to a classic taylor rule. No 26397, nber working papers from national bureau of economic research, inc abstract. Financial crises reveal critical roles of onancial markets by inducing real economic disruptions. Citeseerx document details isaac councill, lee giles, pradeep teregowda. 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. Overall, being responsible for monetary policy means that central banks have an intrinsic and deep interest in a stable financial system.
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