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Monetary and Macroprudential Policy and Welfare in an Estimated Four-Agent New Keynesian Model

Author

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  • George J. Bratsiotis
  • Kasun D. Pathirage

Abstract

We examine the social and agent-specific welfare effects of monetary and macroprudential policy in a four-agent estimated macroeconomic model, consisting of 'banked simple households', 'underbanked simple households', 'firm owners', and 'bank owners'. Optimal capital requirement and loan loss provisions ratios, are shown to improve all agent-specific and social welfare, but imply smaller gains for simple households and firm owners that rely on credit. Countercyclical capital buffers support firm owners and bank owners, with smaller gains for the two simple households. Countercyclical loan loss provisions improve social welfare only for specific shocks and benefit the 'simple underbanked household' and 'firm-owners' at the expense of 'bank-owners' and 'banked simple households'. Coordination between monetary and macroprudential policies yields higher social welfare than no coordination.

Suggested Citation

  • George J. Bratsiotis & Kasun D. Pathirage, 2023. "Monetary and Macroprudential Policy and Welfare in an Estimated Four-Agent New Keynesian Model," Economics Discussion Paper Series 2304, Economics, The University of Manchester.
    • Handle: RePEc:man:sespap:2304
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    File URL: https://hummedia.manchester.ac.uk/schools/soss/economics/discussionpapers/EDP-2304.pdf
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    References listed on IDEAS

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    Cited by:

    1. Aurélien Espic & Lisa Kerdelhué & Julien Matheron, 2024. "Capital Requirements in Light of Monetary Tightening," Working papers 947, Banque de France.

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    More about this item

    Keywords

    monetary policy; macroprudential policy; financial frictions; risk of default; welfare;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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

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