2023-03-09-IMF-Optimal_Monetary_and_Macroprudential_Policies_under_Fire-Sale_Externalities_53页_959kb

Optimal Monetary and Macroprudential Policies under Fire-Sale Externalities

Key Findings:

1. Monetary Policy Trade-off: A fully expansionary monetary policy stabilizes employment but exacerbates inefficient capital reallocation across sectors through fire-sales. This occurs because higher prices reduce asset prices, increasing distortionary fire-sales.
2. Buffering with Monetary Policy: Deeper expansionary monetary policy encourages banks to hold more liquid assets and invest less, reducing fire-sales losses and capital adversity. Thus, monetary policy can significantly mitigate inefficiencies, even without macroprudential tools.
3. Limited Macroprudential Policies: With available macroprudential tools, monetary policy should coordinate with macroprudential regulation. However, when instruments are limited (e.g., only taxing/decreasing investment or using liquidity ratios), the CB must enhance/deepen monetary policy to compensate, as both limit the ability to restore constrained efficiency.
4. Constraint in High Fire-Sale Costs: Efficient allocation relies on both monetary and macroprudential policies. High fire-sale losses reduce the effectiveness of monetary policy alone, even with full macroprudential tools. The optimal policy balances monetary stability with risk mitigation ex-ante.

Implications:

• Monetary Policy Alone: Reduces real inefficiencies but is insufficient without fiscal or macroprudential adjustments.
• Integrated Approach: Policy design must account for fire-sale externalities, which amplify during crises due to combined nominal wage rigidity and financial frictions. Even with tools available, clear monetary coordination with macroprudential policy is optimal to support resilience.