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