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Preventive monetary and macroprudential policy response to anticipated shocks to financial stability

Author

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  • Konstantin Styrin

    (Bank of Russia, Russian Federation)

  • Alexander Tishin

    (Bank of Russia, Russian Federation)

Abstract

In this paper, we develop a simple framework to study the optimal macroprudential and monetary policy interactions in response to financial shocks. Our model combines nominal rigidities and capital accumulation, features that have usually been studied separately in previous literature. In our model, we show that agents do not internalise how their asset purchases affect asset prices. Thus, when crises occur, there are fire sales: less demand for capital further reduces prices and agents are worse off. Policy interventions (both monetary and macroprudential) can improve allocations by restricting borrowing ex-ante (during the accumulation of risks and imbalances) and stimulating the economy ex-post (during crises). As a result, we find a complementary relationship between ex-ante monetary policy and preventive macroprudential policy. We also compare this result with a flexible-price model and a frictionless model and conduct several sensitivity analysis exercises.

Suggested Citation

  • Konstantin Styrin & Alexander Tishin, 2021. "Preventive monetary and macroprudential policy response to anticipated shocks to financial stability," Bank of Russia Working Paper Series wps80, Bank of Russia.
    • Handle: RePEc:bkr:wpaper:wps80
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    More about this item

    Keywords

    Macroprudential policy; monetary policy; pecuniary externalities; nominal rigidities; financial frictions; capital accumulation.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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