Monetary and macroprudential policy interactions in a model of the Euro area

Dennis, R. and Ilbas, P. (2023) Monetary and macroprudential policy interactions in a model of the Euro area. Journal of Economic Dynamics and Control, (doi: 10.1016/j.jedc.2023.104706) (In Press)

Abstract

We use the two-country euro area model developed by Quint and Rabanal (2014) to study policymaking in a monetary union. We focus on: 1) a two-policymaker setting where there is strategic interaction between a single monetary authority and an EMU-level macro-prudential authority, and; 2) a three-policymaker setting where there is strategic interaction between a single monetary authority and two regional-level macroprudential authorities. In the former, price stability and financial stability are pursued at the area-wide level, while in the latter each macro-prudential authority adopts region-specific objectives. We compare cooperative and non-cooperative equilibria in simultaneous-move and leadership environments, each obtained assuming discretionary policymaking. In the two-policymaker setting, we find that the gains from either the monetary authority or the macroprudential regulator having a first-mover, or leadership, advantage are somewhat limited, and the most favorable outcome is achieved under cooperation where both policies are formulated and conducted simultaneously. In the three-policymaker setting, we find that delegating macroprudential policy to regional macroprudential regulators plays an important role in achieving regional stability.

• Item Type: Articles
• Status: In Press
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Dennis, Professor Richard
• Authors: Dennis, R., and Ilbas, P.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Journal of Economic Dynamics and Control
• Publisher: Elsevier
• ISSN: 0165-1889
• ISSN (Online): 1879-1743
• Published Online: 18 July 2023
• Copyright Holders: Copyright © 2023 Elsevier B.V.
• First Published: First published in Journal of Economic Dynamics and Control 2023
• Publisher Policy: Reproduced in accordance with the publisher copyright policy