Stabilization and the policy mix in a monetary union

Abstract

The need for macroprudential policy to “lean against the wind” of credit cycles at the aim of financial and macroeconomic stability has become a common belief. There is also an increasing interest among policymakers and academics in the interaction between this novel tool and other traditional measures of the policy mix. This paper builds a two-country DSGE model for a monetary union and analyzes, through different macroprudential–fiscal scenarios, the response of the main economic variables to a credit risk shock. When national macroprudential policies are implemented, macroeconomic and financial stability is reached in both countries, regardless the nature of fiscal policy. When macroprudential policies are supranational, macroeconomic stability is higher in the country that suffers the shock while the other country is destabilized, also under all kind of fiscal scenarios considered.