Macroprudential policy and DSGE models

Recent appointment from the Banco de España, Dr Margarita Rubio is working on several projects concerning macroprudential and monetary policies in the context of DSGE models with financial frictions. Her work has particular relevance to central banks that are aiming for price stability and financial stability through co-ordinated monetary and macro-prudential policies. Her work has been presented to the Federal Reserve Board of Governors, the St. Louis Federal Reserve Bank, the Central Banks of Costa Rica, Luxembourg and Spain. 

CFCM Fellow Margarita Rubio is working on several projects concerning macroprudential and monetary policies in the context of DSGE models with financial frictions. Together with Jose A. Carrasco-Gallego, she has completed a paper entitled "Macroprudential measures, housing markets, and monetary policy", forthcoming in Moneda y Credito, in which they find that Macroprudential policies are welfare enhancing for the economy, especially when monetary policy only focuses on maintaining price stability. As a follow-up paper, they are working on "Macroprudential and Monetary Policies: Implications for Financial Stability and Welfare", recently presented at the IFABS conference. By using a three-dimensional policy efficiency frontier, in which they include financial stability as a third variable, they show how the interaction between macroprudential and monetary policies makes the economy more stable in terms of output, inflation and credit markets. Furthermore, they find that the optimal policy mix is one in which the central bank should set interest rates responding to inflation while the financial regulation should set loan-to-values mainly responding to changes in house prices. Margarita is also working on assessing the implications of different mortgage contracts for the effects of macroprudential policies. She is also considering macroprudential policies in a monetary union in which members have structural differences. She finds that depending on the source of heterogeneity, macroprudential policies should be implemented either at a national or at a union level. Additionally, Margarita earned a grant from the Central Bank of Luxembourg to build a DSGE model with a banking sector and macroprudential policies for Luxembourg.