Zscore is a simple linear, multifactor model that measures the financial health and economic stability of a company. Prudential policy actions are intended to affect the balance sheet of financial institutions and in this. 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. Then we characterize and solve for the optimal, timeconsistent macroprudential. This paper develops an openeconomy dsge model with an optimizing banking sector to assess the role of capital flows, macro financial linkages, and macroprudential policies. Financial crises reveal critical roles of onancial markets by inducing real economic disruptions.
Optimal policy for macro financial stability gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, and eric r. The grand unifying theory and practice of macroprudential. 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. This paper develops an openeconomy dsge model with an optimizing banking sector to assess the role of capital flows, macrofinancial linkages, and macroprudential policies. There is a new and now extensive literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. This tradeoff depends on the state of the economy and optimal capital. Then we characterize and solve for the optimal, timeconsistent macroprudential policy of a nancial regulator who lacks the ability to commit to future.
Optimal policy for macrofinancial stability gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, eric r. The need of macroprudential policy arises due to market externalities. Prudential policy actions are intended to affect the balance sheet of financial institutions and in this way also financial stability beyer et al. New framework for measuring and managing macrofinancial risk and financial stability dale f. Optimal timeconsistent macroprudential policy javier bianchi, enrique g. The key result is that macroprudential measures can usefully complement monetary policy. Third and finally, the paper proposes a computational algorithm to solve markovperfect optimal policy for problems in which the policy function is not differentiable. Marrying the micro and macroprudential dimensions of. Financial stability and optimal interestrate policy. Make a few additional standard assumptions and a monetary policy that focuses. Wp1726 whats different about bank holding companies. 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. The score is used to predict the probability of a firm going into bankruptcy within next 24. Bailouts, capital controls, exchange rate policy, financial frictions, financial crises, macro financial stability, macro prudential policies.
Financial stability in practice edward elgar publishing. It is therefore desirable that central banks also play a role in financial stability policies, both at the micro and macro levels. 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. Financial stability generally, and financial cycles in particular, hardly feature in the design of fiscal policy. Hsieh and song, 2015, holding all else equal, this. Under such a situation, accompanied with a lack of room for monetary policy, policy makers shed light on. Macroprudential policy and financial stability in the. Financial crises reveal critical roles of nancial markets by inducing real economic disruptions. 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. It is therefore desirable that central banks also play a. Under alternative plausible assumptions regarding the value of key. The interaction between fc and business cycle variables such as output gap provides. 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. Calibrating macroprudential policy to forecasts of.
Optimal policy for macrofinancial stability, research department publications 4818, interamerican development bank, research department. Central banks have a vital role in maintaining financial stability because of the deep underlying connection between it and monetary stability. Monetary policy mainly works through its ability to affect current and expected future interest rates. Stability and identification with optimal macroprudential. Julien bengui looks to understand how significant leakages are whether due to shadow banking, regulatory arbitrage, or other regulation circumvention schemes to the limits and design of macroprudential policy. April 15, 2016 i ljubljana, slovenia i central banking the global financial crisis and its widereaching repercussions on economies across the region has highlighted the critical importance of coordination between policy makers to safeguard financial stability and effectively. Macroprudential policy and bank systemic risk sciencedirect. Optimal policy for macrofinancial stability federal reserve. A recent paper examines how limited regulation enforcement can affect the design of optimal regulatory policy. Capital flows, financial intermediation and macroprudential. Stronger macroprudential intervention may be needed.
However, macroprudential policy has a broader objective than restraining credit growth or housing prices. 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. Optimal monetary policy jeanbernard chatelain 2 updates. Calibrating macroprudential policy to forecasts of financial. There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. Yet history shows that financial crises wreak havoc with public finances. In response, the regulator sets macroprudential capital requirements to tradeoff growth expected output with. As an external member of the bank of englands interim financial policy committee, donald kohn comments on the value of transparency in financial markets, arguing that the more. Towards a financial stabilityoriented fiscal policy. New framework for measuring and managing macrofinancial risk.
Reserve requirements and optimal chinese stabilization policy 3 on average more productive than soes hsieh and klenow, 2009. International finance and macroeconomics, monetary economics. Julien bengui looks to understand how significant leakages are whether due to shadow. 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. Reserve requirements and optimal chinese stabilization policy. This paper investigates the identification, the determinacy and the stability of ad hoc, quasi optimal and optimal policy rules augmented with financial stability indicators such as asset prices deviations from their fundamental values and minimizing the volatility of the policy interest rates, when the central bank precommits to financial stability. Optimal policy for macrofinancial stability, nber working papers 26397, national bureau of economic research, inc.
Financial stability and optimal interestrate policy andrea ajello thomas laubach david l opezsalido taisuke nakata federal reserve board february 2015 abstract we study optimal interestrate policy in a new keynesian model in which the economy is at risk of experiencing a nancial crisis and the probability of a crisis depends on credit. Secondly, under controllability conditions, optimal policy rules parameters of financial stability indicators can all be identified, along with a bounded solution stabilizing an unstable economy. The report is defined as a policy that broadly promote security and stability of financial systems and payment mechanisms. The optimal policy will never involve macroprudential capital inflow taxes or a departure from price stability, whether or not commitment is available. Optimal policy for macrofinancial stability ideasrepec. This tradeoff could be small or even nonexistent when both traditional macro objectives and financial stability objectives call for the same. Macroprudential supervision and financial stability. This tradeoff could be small or even nonexistent when both traditional macro objectives and financial stability objectives call for the same policy action for example, when the credit cycle is approaching its peak, output is above potential, and inflation pressures appear to be building.
Financial stability risk of disruption to financial services that is caused by an impairment of part or all of the financial system and has the potential to have serious negative consequences for the real. Macrofinancial stability and macroprudential analysis pdf 98. Hoenig president, federal reserve bank of kansas city. Financial stability analysis, and macro prudential policy actions, is as much about assessing the implications of ruptures in the financial system on the wider economy. Under such a situation, accompanied with a lack of room of the monetary policy, policy makers shed light on. Gianluca benigno the london school of economics and. There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing.
Debate on the role of policy for financial stability. Capital controls, capital flows, exchange rate policy, financial frictions, financial crises, macro financial stability, prudential policies. The analysis of financial system distress via the ses method can be considered as a new tool of macro prudential policy which take into consideration all elements of the financial system and how they interact with each other and with the economy as a whole. Countercyclical macroprudential polices can help reduce macroeconomic volatility and enhance welfare. Macrofinancial stability and macroprudential analysis ian woolford,1 financial markets department the reserve bank has recently extended its efforts to monitor and analyse financial stability issues. 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. Monetary policy, financial stability, and the zero lower bound. Financial stability and monetary policy international journal of. Christopher otrok university of missouri federal reserve bank of st. Bailouts, capital controls, exchange rate policy, financial frictions, financial crises, macrofinancial stability, macroprudential policies. Young federal reserve bank of new york staff reports, no. Policy coordination for financial stability expert based.
The micro and macroprudential dimensions of financial stability promising discussions are often derailed by lack of precision in the definition of terms, when interlocutors think they share the same understanding but, in fact, do not. 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. The maintenance of financial stability is a key objective of monetary policy, but the record of regulators in achieving this has been lamentable in recent years. Optimal development policies with financial frictions. Macroprudential policy aims at limiting structural vulnerabilities and cyclical behavior of market participants. Optimal policy for macrofinancial stability by gianluca. Quantitatively, this policy reduces sharply the frequency and magnitude of crises, removes fat tails from the distribution of returns, and increases social welfare. Federal reserve board monetary policy, financial stability. Integrating monetary policy and financial stability.
Tax policy, leverage and macroeconomic october 2016 stability. Optimal policy for macrofinancial stability gianluca benigno federal reserve bank of new york lse and cepr huigang chen uber technologies inc. Fixed debt taxes are ine ective at best, and at worst they can be welfarereducing. Optimal policy for macrofinancial stability new york fed. E61, f38, f44, h23 abstract there is a new and now large literature analyzing government policies for financial stability. Macroeconomic risk macroeconomic risk derives from the behaviour of industries and governments and the relationships between them rather than from individual companies. Macrofinancial stability and macroprudential analysis. Optimal policy for macrofinancial stability, working papers 2012041, federal reserve bank of st. In contrast, constant debt taxes are ineffective and can be welfarereducing, while an optimized macroprudential taylor rule is e effective but less so than the optimal policy. A stabilization policy is a macroeconomic strategy enacted by governments and central banks to keep economic growth stable, along with price levels and unemployment. Rethinking financial stability and macroprudential policy. Also, some tools are not aimed at curbing the credit cycle but at increasing the.
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. Should not fiscal policy, too, be an essential part of the postcrisis macro financial stability framework. 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. Optimal capital requirements over the business and. Svensson 2012 suggests that monetary policy should be in charge of price stability while macroprudential policy needs to address financial stability. Policy coordination for financial stability center of.
Overall, being responsible for monetary policy means that central banks have an intrinsic and deep interest in a stable financial system. Both are fundamentally about maintaining the public trust and confidence in money and the financial intermediation that is essential to oil the wheels of commerce. Second, it is best to build on the endogenous cycle. Optimal policy for macrofinancial stability university of virginia. Macroprudential policy is designed to limit systemic risk, thus it exerts topdown approach to financial system. This paper investigates the identification, the determinacy and the stability of ad hoc, quasioptimal and optimal policy rules augmented with financial stability indicators such as asset prices deviations from. Five points about monetary policy and financial stability. Christopher and rebucci, alessandro and young, eric, optimal policy for macrofinancial stability december 2012. Monetary policy framework, financial stability, policy tradeoff. Economic fluctuations and growth, international finance and macroeconomics, monetary economics there is a new and now extensive literature analyzing government policies for financial stability.
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. We argue for a macrofinancial stability framework, in which the macroprudential. Hsieh and song, 2015, holding all else equal, this reallocation may raise aggregate productivity. From this viewpoint, the development of macro financial models linking financial instability and the performance of the economy is of the essence. Louis alessandro rebucci johns hopkins university cepr and nber eric r. April 15, 2016 i ljubljana, slovenia i central banking the global financial crisis and its widereaching repercussions on economies across the. 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. We also evaluate the e ectiveness of policy rules simpler than the optimal policy. 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. Optimal policy for macrofinancial stability, cepr discussion papers 9223, c. Monetary policy, the 2015 midwest macro meetings at the st.
610 362 16 551 94 974 952 1047 1143 781 534 997 1279 1397 1166 476 966 516 262 834 658 1127 119 565 1016 564 138 66 1372 1453 1015 199 871 368 194 360 1039 699 1155 904 884 981