Macro-prudential and monetary policy work well together – ECB paper

ECB headquarters
The European Central Bank headquarters in Frankfurt

Policy-makers can best respond to financial crises if they use both monetary and macro-prudential policy, a working paper published by the European Central Bank finds.

In Targeting financial stability: macroprudential or monetary policy? David Aikman, Julia Giese, Sujit Kapadia and Michael McLeay look at how the two kinds of policy interact in response to various simulated shocks.

They use a simple New Keynesian model, in which credit booms can lead to a financial crisis. This model, the

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