Optimal Monetary and Prudential Policies

Collard, Fabrice and Dellas, Harris and Diba, Behzad and Loisel, Olivier,(2017), Optimal Monetary and Prudential Policies. , American Economic Journal: Macroeconomics 2017, 9(1): 40–87, UNSPECIFIED

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The recent financial crisis has highlighted the interconnectedness between macroeconomic and financial stability, raising questions about how to combine monetary and prudential policies. This paper characterizes the jointly optimal monetary and prudential policies, setting the interest rate and bank- capital requirements. The source of financial fragility is the socially excessive risk taking by banks due to limited liability and deposit insurance. We provide conditions under which locally (Ramsey) optimal policy dedicates the prudential instrument to preventing inefficient risk taking by banks, and the monetary instrument to dealing with the business cycle, with the two instruments covarying either negatively, or positively and countercyclically.
Keywords : JEL E32, E43, E44, E52, G01, G21, G28, UNSPECIFIED
Journal or Publication Title: American Economic Journal: Macroeconomics 2017, 9(1): 40–87
Volume: 9
Number: 1
Item Type: Article
Subjects: Ekonomi Pembangunan
Depositing User: Elok Inajati
Date Deposited: 20 Dec 2019 08:38
Last Modified: 20 Dec 2019 08:38
URI: https://repofeb.undip.ac.id/id/eprint/611

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