The benefits of CCyB
When should monetary versus macroprudential tools be used and how should they be combined? This is the question Giese et al. are addressing in this paper. They develop a two-period New Keynesian model incorporating the possibility of a credit boom precipitating a financial crisis and a loss function reflecting financial stability considerations. A crucial assumption is that both monetary and macroprudential policies can affect the supply of credit in the economy and hence GDP and inflation. They find that deploying the countercyclical capital buffer (CCyB) improves outcomes significantly relative to when interest rates are the only instrument.
We find that economic outcomes substantially improve when the policymaker can deploy the CCyB to respond to changing financial stability risks rather than relying solely on interest rates. When a policymaker only has one tool available, there is a significant trade-off between financial and monetary stability.
Unifying monetary and macroprudential policy
Authors: Julia Giese, Michael McLeay, David Aikman and Sujit Kapadia
From: King’s College London, Bank of England, European Central Bank
The global financial cycle and macropru
In this paper, Andra Coman examines how unexpected US, UK, and Euro Area monetary policy shocks impact domestic indicators of financial stability such as bank lending and house prices in different EU countries, and how domestic (macro)prudential policies can offset some of the foreign monetary policy spillovers. He uses data from the MaPPED database which covers a wide range of (macro)prudential policy actions in 28 EU countries from 2000 to 2018, such as capital buffers, lending standard restrictions, limits of credit growth and volume, risk weights, minimum capital requirements, limits on large exposures and concentration. Coman finds that an EU country with tighter prudential policies faces significantly smaller reductions in bank credit and house prices following a monetary policy tightening shock from the US and the UK, and to some extent from EA. In particular:
A +1pp exogenous tightening of US monetary policy leads to a 2pp fall in bank credit and a 2.5pp fall in house prices on average, after around 15 months, in EU countries with no prudential policy actions in place. Further, a +1pp tightening of UK monetary policy leads to a 3.7pp fall in house prices and a 1pp drop in bank credit for EU countries. Results show that an EU country with an additional (one standard deviation) macroprudential policy tightening action – such as capital buffers – faces a substantially smaller spillover in the face of US monetary policy, with an offsetting effect of up to 1.9pp for bank credit and 1.3pp for house prices respectively. Measures such as risk weights and limits on large exposures, have a similar offsetting effect of up to 1.5pp and respective up to 2.4 for house prices in EU countries that are facing UK monetary policy spillovers.
Monetary policy spillovers and the role of prudential policies in the European Union
Author: Andra Coman
From: ECB
