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Abstract

We propose a general equilibrium framework that highlights the interaction of reserve requirements and a conventional monetary policy in a model that combines endogenous housing loan defaults and financial intermediation frictions due to the costs of enforcing contracts. We use the model to examine how the interaction of these policies affect (i) the credit and business cycle; (ii) the distribution of welfare between savers and borrowers; (iii) the overall welfare objectives when monetary and macroprudential policies are optimised together or separately. We find that models with an optimised reserve ratio rule are effective in reducing the sudden boom and bust of credit and the business cycle. We also find that there are a distributive implications of the introduction of reserve ratio where borrowers gain at the expense of savers. However, there is no difference in the overall welfare results whether monetary and macroprudential policies are optimised together or separately.

Publication Type:	Monograph (Discussion Paper)
Additional Information:	Copyright, 2021, the authors.
Publisher Keywords:	Reserve requirements, endogenous loan defaults, welfare
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HN Social history and conditions. Social problems. Social reform
Departments:	School of Policy & Global Affairs > Economics School of Policy & Global Affairs > Economics > Discussion Paper Series

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