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Should monetary policy use its short-term policy rate to stabilize the growth in household credit and housing prices with the aim of promoting financial stability? We ask this question for the case of Canada. We find that to a first approximation, the answer is no— especially when the economy is slowing down.

Monetary policy --- Housing --- Econometric models. --- Prices --- Affordable housing --- Homes --- Houses --- Housing needs --- Residences --- Slum clearance --- Urban housing --- City planning --- Dwellings --- Human settlements --- Monetary management --- Economic policy --- Currency boards --- Money supply --- Social aspects --- Banks and Banking --- Finance: General --- Financial Risk Management --- Inflation --- Money and Monetary Policy --- Monetary Policy --- Central Banks and Their Policies --- Financial Markets and the Macroeconomy --- Policy Objectives --- Policy Designs and Consistency --- Policy Coordination --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Financial Crises --- Interest Rates: Determination, Term Structure, and Effects --- General Financial Markets: Government Policy and Regulation --- Price Level --- Deflation --- Monetary economics --- Economic & financial crises & disasters --- Banking --- Finance --- Macroeconomics --- Credit --- Financial crises --- Central bank policy rate --- Financial sector stability --- Money --- Financial services --- Financial sector policy and analysis --- Interest rates --- Financial services industry --- Canada

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We introduce time-varying systemic risk in an otherwise standard New-Keynesian model to study whether a simple leaning-against-the-wind policy can reduce systemic risk and improve welfare. We find that an unexpected increase in policy rates reduces output, inflation, and asset prices without fundamentally mitigating financial risks. We also find that while a systematic monetary policy reaction can improve welfare, it is too simplistic: (1) it is highly sensitive to parameters of the model and (2) is detrimental in the presence of falling asset prices. Macroprudential policy, similar to a countercyclical capital requirement, is more robust and leads to higher welfare gains.

International finance. --- International Monetary Fund. --- Monetary policy -- Econometric models. --- Money --- Finance --- Business & Economics --- Inflation --- Investments: Stocks --- Macroeconomics --- Industries: Financial Services --- Monetary Policy --- Central Banks and Their Policies --- Financial Markets and the Macroeconomy --- Policy Objectives --- Policy Designs and Consistency --- Policy Coordination --- Financial Institutions and Services: General --- Price Level --- Deflation --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Investment & securities --- Financial sector --- Asset prices --- Stocks --- Nonbank financial institutions --- Economic sectors --- Prices --- Financial institutions --- Financial services industry --- United States

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The Global Financial Crisis has reopened discussions on the role of the monetary policy in preserving financial stability. Determining whether monetary policy affects financial variables domestically—especially compared to the effects of macroprudential policies— and across borders, is crucial in this context. This paper looks into these issues using U.S. exogenous monetary policy shocks and macroprudential policy measures. Estimates indicate that monetary policy shocks have significant and persistent effects on financial conditions and can attenuate long-term financial instability. In contrast, the impact of macroprudential policy measures is generally more immediate but shorter-lasting. Also, while an exogenous increase in U.S. monetary policy rates tends to reduce credit and house prices in other countries—with the effects varying with country-specific characteristics—an increase driven by improved U.S. economic conditions tends to have the opposite effect. Finally, we do not find evidence of cross-border spillover effects associated with U.S. macroprudential policies.

Finance: General --- Macroeconomics --- Money and Monetary Policy --- Monetary Policy --- Central Banks and Their Policies --- Business Fluctuations --- Cycles --- Financial Crises --- Financial Markets and the Macroeconomy --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- General Financial Markets: Government Policy and Regulation --- Monetary economics --- Finance --- Macroprudential policy instruments --- Macroprudential policy --- Credit --- Financial sector stability --- Bank credit --- Financial sector policy and analysis --- Money --- Economic policy --- Financial services industry --- United States