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Monetary and Macroprudential Policy Coordination Among Multiple Equilibria, Itai Agur

The notion of a tradeoff between output and financial stabilization is based on monetary-macroprudential models with unique equilibria. Using a game theory setup, this paper shows that multiple equilibria lead to qualitatively different results. Monetary and macroprudential authorities have tools that impose externalities on each other's objectives. One of the tools (macroprudential) is coarse, while the other (monetary policy) is unconstrained. We find that this asymmetry always leads to multiple equilibria, and show that under economically relevant conditions the authorities prefer different equilibria. Giving the unconstrained authority a weight on "helping" the constrained authority ("leaning against the wind") now has unexpected effects. The relation between this weight and the difficulty of coordinating is hump-shaped, and therefore a small degree of leaning worsens outcomes on both authorities' objectives
Table Of Contents
Intro -- Cover -- Contents -- I. Introduction -- II. Game with unconstrained tools -- III. Constrained tools -- IV. Conflict among the authorities -- V. Coordination cost -- A. The impact of leaning on coordination -- B. Non-equivalence of the authorities -- VI. Social welfare implications -- A. Leaning and social welfare -- B. First-best -- VII. Alternative game forms -- A. Stackelberg game -- B. Dynamic games -- C. Merging the authorities -- VIII. Conclusions -- Appendix A -- Appendix B -- References -- Figures -- Figure 1. Output and financial gaps in numerical example -- Figure 2. Play towards the single Nash Equilibrium with unconstrained tools -- Figure 3. How a constrained macroprudential tool gives rise to multiple Nash Equilibria -- Figure 4. Leaning and the loss functions of MA and REG -- Figure 5. The hump-shaped relation between leaning and coordination costs -- Figure 6. Leaning backfires over full possible range -- Figure 7. Leaning backfires over part of parameter range -- Figure 8. Third derivatives and conflicting equilibria. -- Figure 9. Minimum coordination cost switches between authorities -- Figure 10. Hump-cum-plateau shaped relation
Literary Form
non fiction
Physical Description
1 online resource (34 pages)
Specific Material Designation
Form Of Item

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