Optimal Monetary and Macroprudential Policies Under Fire-Sale Externalities

Download or read book Optimal Monetary and Macroprudential Policies Under Fire-Sale Externalities written by Flora Lutz and published by International Monetary Fund. This book was released on 2023-03-10 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: I provide an integrated analysis of monetary and macroprudential policies in a model economy featuring a financial friction and a nominal wage rigidity. In this set-up, the monetary authority faces a trade-off between macroeconomic and financial stability: While expansionary counter-cyclical monetary policy prevents involuntary unemployment, it also amplifies an inefficient reallocation of capital across sectors. The main contribution of the analysis is threefold: First it highlights a novel channel through which monetary policy can impact financial stability. Second, it shows that, by itself, monetary policy can significantly mitigate the wedge between the constrained efficient and the competitive allocation. Third, regardless of the availability of macroprudential tools, stabilizing demand is usually not optimal for monetary policy.