scholarly journals Financial Stability and Sustainability under the Coordination of Monetary Policy and Macroprudential Policy: New Evidence from China

2019 ◽  
Vol 11 (6) ◽  
pp. 1616 ◽  
Author(s):  
Ying Jiang ◽  
Chong Li ◽  
Jizhou Zhang ◽  
Xiaoyi Zhou
Keyword(s):  
Monetary Policy ◽  
Risk Taking ◽  
Financial Stability ◽  
Stock Price ◽  
Generalized Method Of Moments ◽  
Housing Prices ◽  
Policy Coordination ◽  
Macroprudential Policy ◽  
Price Bubbles ◽  
Coordination Effect

After the financial crisis, financial stability and sustainability became key to global economic and social development, and the coordination of monetary policy and macroprudential policy plays a crucial role in maintaining financial stability and sustainability. This paper provides a theoretical analysis and empirical evidence from China on the impact of monetary policy and macroprudential policy coordination on financial stability and sustainability. We collect data from 2003 to 2017; from the micro level, we use the System Generalized Method of Moments (System GMM) method to analyze the monetary policy and macroprudential policy coordination effect on 88 commercial banks’ risk-taking; from the macro level, we use the Structural Vector Autoregression (SVAR) method to analyze the two policies coordination effect on housing prices and stock price bubbles. The conclusions are as follows: firstly, for regulating bank risk-taking, monetary policy and macroprudential policy should conduct counter-cyclical regulation simultaneously; secondly, for regulating housing prices, tight monetary policy and tight macroprudential policy should be implemented alternately; thirdly, for regulating stock price bubbles, macroprudential policy should be the first line of defense and monetary policy should be the second one.

scholarly journals Monetary and Macroprudential Policy with Endogenous Risk

2020 ◽  
Vol 20 (236) ◽  
Author(s):  
Tobias Adrian ◽  
Fernando Duarte ◽  
Nellie Liang ◽  
Pawel Zabczyk
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Risk Taking ◽  
New Keynesian ◽  
Output Gap ◽  
Macroprudential Policy ◽  
Endogenous Risk ◽  
Nk Model ◽  
Risk Return ◽  
Financial Conditions

We extend the New Keynesian (NK) model to include endogenous risk. Lower interest rates not only shift consumption intertemporally but also conditional output risk via their impact on risk-taking, giving rise to a vulnerability channel of monetary policy. The model fits the conditional output gap distribution and can account for medium-term increases in downside risks when financial conditions are loose. The policy prescriptions are very different from those in the standard NK model: monetary policy that focuses purely on inflation and output-gap stabilization can lead to instability. Macroprudential measures can mitigate the intertemporal risk-return tradeoff created by the vulnerability channel.

scholarly journals The Role of Financial Stability Considerations in Monetary Policy and the Interaction with Macroprudential Policy in the Euro Area

2021 ◽  
Author(s):  
Ugo Albertazzi ◽  
Emmanuelle Assouan ◽  
Oreste Tristani ◽  
Gabriele Galati ◽  
Thomas Vlassopoulos ◽  
...  
Keyword(s):  
Monetary Policy ◽  
Euro Area ◽  
Financial Stability ◽  
Macroprudential Policy

Macroprudential policy – closing the financial stability gap

2017 ◽  
Vol 25 (4) ◽  
pp. 334-359 ◽  
Author(s):  
Stephan Fahr ◽  
John Fell
Keyword(s):  
Monetary Policy ◽  
Financial Stability ◽  
Relative Effectiveness ◽  
Policy Instruments ◽  
Price Stability ◽  
Macroprudential Policy ◽  
Content Type ◽  
Macroprudential Policies ◽  
Trade Offs ◽  
System Resilience

Purpose The global financial crisis demonstrated that monetary policy alone cannot ensure both price and financial stability. According to the Tinbergen (1952) rule, there was a gap in the policymakers’ toolkit for safeguarding financial stability, as the number of available policy instruments was insufficient relative to the number of policy objectives. That gap is now being closed through the creation of new macroprudential policy instruments. Both monetary policy and macroprudential policy have the capacity to influence both price and financial stability objectives. This paper develops a framework for determining how best to assign instruments to objectives. Design/methodology/approach Using a simplified New-Keynesian model, the authors examine two sets of policy trade-offs, the first concerning the relative effectiveness of monetary and macroprudential policy instruments in achieving price and financial stability objectives and the second concerning trade-offs between macroprudential policy instruments themselves. Findings This model shows that regardless of whether the objective is to enhance financial system resilience or to moderate the financial cycle, macroprudential policies are more effective than monetary policy. Likewise, monetary policy is more effective than macroprudential policy in achieving price stability. According to the Mundell (1962) principle of effective market classification, this implies that macroprudential policy instruments should be paired with financial stability objectives, and monetary policy instruments should be paired with the price stability objective. The authors also find a trade-off between the two sets of macroprudential policy instruments, which indicates that failure to moderate the financial cycle would require greater financial system resilience. Originality/value The main contribution of the paper is to establish – with the help of a model framework – the relative effectiveness of monetary and macroprudential policies in achieving price and financial stability objectives. By so doing, it provides a rationale for macroprudential policy and it shows how macroprudential policy can unburden monetary policy in leaning against the wind of financial imbalances.

New Mortgage Lenders and the Housing Market*

2020 ◽  
Author(s):  
Nikodem Szumilo
Keyword(s):  
Risk Taking ◽  
Financial Stability ◽  
House Prices ◽  
Housing Prices ◽  
Real Estate Market ◽  
Mortgage Lending ◽  
Mortgage Market ◽  
The Real Estate ◽  
Banking Market ◽  
The Real Estate Market

Abstract This article examines the effect of a new lender’s entry into a local mortgage market on the supply of new loans, housing prices and repossessions in areas around its branches. I use the decision of the European Commission to force the UK’s largest retail bank to divest a part of its business as a shock to the entry of a new lender, and show that incumbent banks increase mortgage lending in areas where the new bank has its branches. Furthermore, house prices increase by around 5% in the real estate market impacted by the shock. Average transaction numbers and mortgage repossession rates also increase in places where the new bank enters. Overall, my results show that increased competition in the banking market can have adverse consequences for risk-taking and financial stability.

scholarly journals The impact of monetary policy and bank competition on banking industry risk: A default analysis

2021 ◽  
Vol 16 (1) ◽  
pp. 205-215
Author(s):  
Sri Ayomi ◽  
Eleonora Sofilda ◽  
Muhammad Zilal Hamzah ◽  
Ari Mulianta Ginting
Keyword(s):  
Monetary Policy ◽  
Financial Stability ◽  
Banking Industry ◽  
Negative Impact ◽  
Generalized Method Of Moments ◽  
Dynamic Panel Data ◽  
Probability Of Default ◽  
Bank Competition ◽  
Banking Competition ◽  
The Impact

In the financial system and economy, the banking industry plays a crucial role. Default risk takes central stage in preserving financial stability and needs to be mitigated as it can trigger a crisis. The study examines the combined effects of monetary policy and bank competition on banking defaults. Using a sample of 95 commercial banks in Indonesia between 2009 and 2019, this study employs the Generalized Method of Moments, a two-step dynamic panel-data estimation system, to analyze it. Empirical estimation results show that monetary policy, through an increase in the benchmark interest rate, negatively affects probability of default. The extent of banking stability is also enhanced by monetary policy. Banking competition has a negative and significant effect on probability of default and has a positive effect on the banking distance to default. Furthermore, the combined impact of monetary policy and banking competition positively affects probability of default but has a negative impact on the distance of default. Building on this study, to promote a stable and more efficient banking system, policymakers should develop policies that foster complementary monetary and competition policies.

scholarly journals The Role of Capital Regulation and Risk-Taking by Banks in Monetary Policy

2014 ◽  
Vol 5 (1) ◽  
pp. 7-26
Author(s):  
Małgorzata Olszak
Keyword(s):  
Monetary Policy ◽  
Risk Taking ◽  
Financial Stability ◽  
Central Banks ◽  
Output Growth ◽  
Capital Regulation ◽  
Bank Capital ◽  
Endogenous Factors ◽  
Credit Cycle

The credit boom prevailing in the period preceding the last financial crisis was prolonged and associated with neither particularly strong output growth nor rising inflation in economies in which it occurred. This type of credit cycle and financial cycle is hard to reconcile with existing economic theory applied in monetary policy. In this paper we point out to endogenous factors behind this phenomenon. We aim to identify what is the role of bank capital regulation and bank risktaking in the transmission mechanism of monetary policy. The transmission of monetary policy impulses through capital channel is a diversified process, and depends on bank specific, background macroeconomics’s specific and other factors. Bank capital standards affect the banks’ perception, management and pricing of risks. In this area, monetary policy is also of great importance, with prominent role of the so called risk-taking channel in which central banks actions have an impact on bank risk attitudes. Consequently monetary policy is not fully neutral from a financial stability perspective. Stable level of inflation does not guarantee the stability of financial system. Therefore central banks in their conduct of monetary policy should constrain the build-up of financial imbalances.

scholarly journals Monetary Policy, Macroprudential Policy, and Financial Stability

2019 ◽  
Vol 11 (1) ◽  
pp. 809-832 ◽  
Author(s):  
David Martinez-Miera ◽  
Rafael Repullo
Keyword(s):  
Monetary Policy ◽  
Equilibrium Model ◽  
Financial Stability ◽  
Theoretical Perspective ◽  
Capital Requirements ◽  
Equity Capital ◽  
Open Market ◽  
Macroprudential Policy ◽  
Macroprudential Policies

This review reexamines from a theoretical perspective the role of monetary and macroprudential policies in addressing the build-up of risks in the financial system. We construct a stylized general equilibrium model in which the key friction comes from a moral hazard problem in firms’ financing that banks’ equity capital serves to ameliorate. Tight monetary policy is introduced by open market sales of government debt, and tight macroprudential policy by an increase in capital requirements. We show that both policies are useful, but macroprudential policy is more effective in fostering financial stability and leads to higher social welfare.

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