A Policy Model To Analyze Macroprudential Regulations And Monetary Policy

Abstract

We construct a small-open-economy, new Keynesian dynamic stochastic general-equilibrium model with real financial linkages to analyze the effects of financial shocks and macroprudential policies on the Canadian economy. The model incorporates rich interactions between the balance sheets of households, firms and banks, long-term household and business debt, macroprudential policy instruments and nominal and real rigidities and is calibrated to match dynamics in Canadian macroeconomic and financial data. We study the transmission of monetary policy and financial and real shocks in the model economy and analyze the effectiveness of various policies in simultaneously achieving macroeconomic and financial stability. We find that, in terms of reducing household debt, more targeted tools such as loan-to-value regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively.

Publication Date

8-1-2018

Publication Title

Canadian Journal of Economics

Volume

51

Issue

3

Number of Pages

828-863

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1111/caje.12339

Socpus ID

85052794452 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/85052794452

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