By Luc Laeven, Angela Maddaloni and Caterina Mendicino
What are the trade-offs involved in the implementation of macroprudential and monetary measures? And how do monetary and macroprudential policies interact? Recent research conducted at the European Central Bank (ECB) tackles these questions both theoretically and empirically. Luc, Angela, and Caterina argue that monetary and macroprudential policies face important trade-offs. In addition, since monetary and macroprudential policies transmit to the broad economy via the financial system, they unavoidably affect each other’s effectiveness. Taking these factors into account is key for the design and implementation of both policies. There are clear advantages of limiting the constraints on the practical implementation of macroprudential policy as well as of accounting for financial stability considerations when taking monetary policy decisions.
The main goal of this policy brief is to provide a research-based overview on monetary policy, macroprudential policy and financial stability. Luc, Angela, and Caterina focus on the two sets of questions addressed by recent research carried out within the ECB’s Research Task Force on monetary policy, macroprudential policy and financial stability. First, the authors analyse what the potential trade-offs are that monetary and macroprudential policies face. They also explore the spillovers among these policies and how they interact.