Posted

January 06, 2012 07:15:49 AM

Date

2011-12

Author

Daniel Sámano

Affiliation

Banco de Mexico

Title

In the Quest of Macroprudential Policy Tools

Summary /
Abstract

The global financial crisis of late 2008 could not have provided more convincing evidence that price stability is not a sufficient condition for financial stability. In order to attain both, central banks must develop macroprudential instruments in order to prevent the occurrence of systemic risk episodes. For this reason testing the effectiveness of different macroprudential tools and their interaction with monetary policy is crucial. In this paper we explore whether two policy instruments, namely, a capital adequacy ratio rule in combination with a Taylor rule may provide a better macroeconomic outcome than a Taylor rule alone. We conduct our analysis by appending a macroeconometric financial block to an otherwise standard semistructural small open economy neokeynesian model for policy analysis estimated for the Mexican economy. Our results show that with the inclusion of the second instrument, the central bank may obtain substantial gains. Specifically, the central authority can isolate financial shocks and dampen their effects over macroeconomic variables.

Keywords

Macroprudential policy, monetary policy, capital requirements

URL

http://d.repec.org/n?u=RePEc:bdm:wpaper:2011-17&r=mac

Remarks

In the above paper, Daniel Sámano of Banco de Mexico explores "whether two policy instruments, namely, a capital adequacy ratio (CAR) rule in combination with a Taylor rule may provide a better macroeconomic outcome than a Taylor rule alone," conducting his analysis by adding a financial block to a Neo-Keynesian, semistructural small open economy model estimated using Mexican data. With a CAR rule as second instrument, he concludes that Banco de Mexico can continue to implement small, measured increments in the policy rates, with lower variability in inflation and output outcomes. His model is estimable and potentially useful when adapted to the Philippine situation.

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