Ex-ante, the central bank chooses the socially optimal level of inflation. From a policy perspective, our analysis suggests that a conflict between price and financial stability objectives may arise if pursued by a single institution. These are the fields, ordered by number of announcements, along with their dates. In this setting, a time inconsistency problem arises. Excerpts Introduction A growing literature based on models where pecuniary externalities reinforce shocks in the aggregate advocates the use of macro-prudential regulation e. In our framework, monetary policy can re-optimize following a realization of credit shocks, but macro-prudential regulation cannot be adjusted immediately after the credit shock.
Please ask Hassan Zaidi to update the entry or the correct email address. The key finding of the paper is that a dual-mandate central bank is not socially optimal. We then consider the role of political pressures in the spirit of Barro and Gordon 1983. This allows to link your profile to this item. Kurz, Sascha Napel, Stefan Nohn, Andreas Members of a shareholder meeting or legislative committee have greater or smaller voting power than meets the eye if the nucleolus of the induced majority game differs from the voting weight distribution. For instance, benefits from information sharing and use of central bank expertise may mitigate the welfare losses we have shown may arise see Nier, Osinski, J´acome and Madrid 2011 , although information sharing would also benefit fiscal and monetary interactions.
If the author is listed in the directory of specialists for this field, a link is also provided. For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jim Beardow or Hassan Zaidi The email address of this maintainer does not seem to be valid anymore. Numerical analysis in our model suggest however, that in most cases a non-independent macro-prudential regulator with independent monetary authority delivers a better outcome than a non-independent central bank in charge of both price and financial stability. The natural next question is how to implement macro-prudential regulation. Ex-post, however, the central bank chooses inflation above the social optimum to reduce the real value of private debt.
Monetary policy, on the other hand, can be used ex-ante and ex-post. Ex-ante, the central bank chooses the socially optimal level of inflation. Finally, if the only distortion of concern is political interference i. In our model, there are two stages, in the first stage, the policymaker possibly a single or several institutions makes simultaneous monetary policy and macro-prudential regulation decisions. Importantly, this result arises even when the central bank is politically independent. We show that if either the macro-prudential regulator or the central bank or both are not politically independent, separation of price and financial stability objectives does not deliver the social optimum.
This inefficient outcome arises when macro-prudential policies cannot be adjusted as frequently as monetary. Importantly, this result arises even when the. This inefficient outcome arises when macro-prudential policies cannot be adjusted as frequently as monetary. Ex-ante, the central bank chooses the socially optimal level of inflation. This is because the central bank finds it optimal ex-post to let inflation rise to repair private balance sheets because ex-post it has only monetary policy to do so. Townsend , International Economic Review, 2010, vol.
This central bank has the ex-post incentive to reduce the real burden of private debt through inflation, similar to the incentives to monetize public sector debt studied in Calvo 1978 and Lucas and Stokey 1983. Townsend , Review of Economic Studies, 2006, vol. Implementing macro-prudential policy requires, among other things, figuring out the optimal institutional design. The E-mail message field is required. When a central bank is in charge of price and financial stability, a new time inconsistency problem may arise. We then consider the role of political pressures in the spirit of Barro and Gordon 1983.
The paper also fully characterizes optimal monetary policy and provides conditions under which zero inflation is the optimal policy. This central bank finds it optimal ex-ante to deliver the social optimal level of inflation, but it does not do so ex-post. We show that if either the macro-prudential regulator or the central bank or both are not politically independent, separation of price and financial stability objectives does not deliver the social optimum. We consider the optimality of various institutional arrangements for agencies that conduct macro-prudential regulation and monetary policy. We find that the above result prevails if policy is conducted by politically independent institutions. This outcome arises because ex-post the dual-mandate central bank has only one tool, monetary policy, to achieve financial and price stability.
In this context, there is an intense policy debate about the desirability of assigning the central bank formally with the responsibility of financial stability. When a central bank is in charge of price and financial stability, a new time inconsistency problem may arise. Ex-ante, the central bank chooses the socially optimal level of inflation. To link different versions of the same work, where versions have a different title,. General contact details of provider:. We then examine the role of political factors with a simple variation of our model in the spirit of Barro and Gordon 1983.
To update listings or check citations waiting for approval, Fabian Valencia should log into the. Importantly, this result arises even when the. Our results also extend the earlier findings by Barro and Gordon 1983 and many others on political independence of the central bank to show that these results are also applicable to a macro-prudential regulator. We differ from a rapidly expanding literature on macro-prudential and monetary interactions, including De Paoli and Paustian 2011 and Quint and Rabanal 2011 , mainly in that our focus is on the potential time-inconsistency problems that can arise, which are not addressed in existing work. We establish a new sufficient condition for the weight and power distributions to be equal; and we characterize the limit behavior of the nucleol.
You can help correct errors and omissions. Under this extension, separation of price and financial stability objectives delivers the social optimum only if both institutions are politically independent. Which arrangement generates lower welfare losses in the case of non-independence depends on parameter values. Ex-ante, the central bank chooses the socially optimal level of inflation. Ex-post, however, the central bank chooses inflation above the social optimum to reduce the real value of private debt. Note that if the versions have a very similar title and are in the author's profile, the links will usually be created automatically.