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Optimal Macroprudential and Monetary Policy in a Currency Union

Author

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  • Dmitriy Sergeyev

    (Bocconi University)

Abstract
I solve for optimal macroprudential and monetary policies for members of a currency union in an open economy model with nominal price rigidities, demand for safe as- sets, and collateral constraints. Monetary policy is conducted by a single central bank, which sets a common interest rate. Macroprudential policy is set at a country level through the choice of reserve requirements. I emphasize two main results. First, with asymmetric countries and sticky prices, the optimal macroprudential policy has a country-specific stabilization role beyond optimal regulation of financial sectors. This result holds even if optimal fiscal transfers are allowed among the union members. Second, there is a role for global coordination of country-specific macroprudential policies. This is true even when countries have no monopoly power over prices of internationally traded goods or assets. These results build the case for coordinated macroprudential policies that go beyond achieving financial stability objectives.

Suggested Citation

  • Dmitriy Sergeyev, 2016. "Optimal Macroprudential and Monetary Policy in a Currency Union," 2016 Meeting Papers 463, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:463
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    References listed on IDEAS

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    Cited by:

    1. Luca Fornaro & Federica Romei, 2019. "The Paradox of Global Thrift," American Economic Review, American Economic Association, vol. 109(11), pages 3745-3779, November.
    2. Luca Fornaro & Federica Romei, 2018. "The Paradox of Global Thrift (Plus Appendix)," Working Papers 1039, Barcelona School of Economics.
    3. Michael Woodford, 2016. "Quantitative Easing and Financial Stability," Central Banking, Analysis, and Economic Policies Book Series, in: Elías Albagli & Diego Saravia & Michael Woodford (ed.),Monetary Policy through Asset Markets: Lessons from Unconventional Measures and Implications for an Integrated World, edition 1, volume 24, chapter 6, pages 151-233, Central Bank of Chile.
    4. Fornaro, Luca, 2019. "Monetary Union and Financial Integration," CEPR Discussion Papers 14216, C.E.P.R. Discussion Papers.
    5. Agénor, Pierre-Richard & Jackson, Timothy & Jia, Pengfei, 2021. "Macroprudential policy coordination in a currency union," European Economic Review, Elsevier, vol. 137(C).
    6. Luca Fornaro, 2022. "A Theory of Monetary Union and Financial Integration," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(4), pages 1911-1947.
    7. Bengui, Julien & Bianchi, Javier, 2022. "Macroprudential policy with leakages," Journal of International Economics, Elsevier, vol. 139(C).
    8. Luca Fornaro, 2017. "Aggregate Demand Externalities in a Global Liquidity Trap," 2017 Meeting Papers 139, Society for Economic Dynamics.
    9. Dennis, Richard & Ilbas, Pelin, 2023. "Monetary and macroprudential policy interactions in a model of the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 154(C).

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