Macroprudential Measures and Monetary Policy Management in a Small, Open Economy

This paper studies the role of macroprudential policies on economic fluctuations, and their interaction with monetary policy. We introduce an imperfectly competitive banking sector in a general equilibrium model with financial frictions. Banks lend to households and firms through deposits, capital and foreign debts. Restrictions on the bank balance sheet establish a link among the business cycles, and the supply and cost of credits. It is found that the use of capital requirements increases the real effects of monetary policy, because such macroprudential policy acts in a complementary manner on inflation, and reduces financial fluctuations to monetary shocks. However, capital requirements do not alter the effects of financial shocks on key macroeconomic and financial variables such as credits and interest rates. (Audio: Department of Economic Publications)