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An Optimal Macroprudential Policy Mix for Segmented Credit Markets

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  • Jelena Zivanovic

Abstract

This paper analyzes the design of simple macroprudential rules for bank and non-bank credit markets in a medium-scale dynamic stochastic general equilibrium model. In the model, mutual funds support corporate bond issuance by rms with access to capital markets; a banking sector supplies loans to the remaining producers. This model is used to study the optimal design of monetary and macroprudential rules and to address whether financial stability in the banking and bond markets is welfare improving. First, in response to aggregate productivity and financial shocks, the welfare-maximizing monetary policy rule implies near price stability, while the optimal macroprudential policy rule stabilizes bank credit and bond volumes. Second, there is no trade-off between price and financial stability. Third, if the central bank cannot correctly identify a sector-specific financial shock, responding optimally as if the shock affects both sectors, then welfare outcomes are negligibly worse than those under the optimal policy.

Suggested Citation

  • Jelena Zivanovic, 2021. "An Optimal Macroprudential Policy Mix for Segmented Credit Markets," Staff Working Papers 21-31, Bank of Canada.
    • Handle: RePEc:bca:bocawp:21-31
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    References listed on IDEAS

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    Cited by:

    1. Li, Kexin & Chen, Zhongfei & Andrikopoulos, Athanasios, 2024. "Capital inflow liberalization and bank credit risk," Journal of International Money and Finance, Elsevier, vol. 142(C).

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    More about this item

    Keywords

    Business fluctuations and cycles; Credit and credit aggregates; Credit risk management; Financial stability; Financial system regulation and policies;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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