Monetary and macroprudential policies under rules and discretion

Abstract

We study the policy design problem faced by central banks with both monetary and macroprudential objectives. We find that a time-consistent policy is preferred to a widely-studied class of simple monetary and macroprudential rules. When interest rates adjust to macroprudential policy in an augmented monetary policy rule, improved outcomes result. When policy authority is split between institutions, strategic interactions between discretionary policymakers can result in notably poor outcomes. Show more