Coordination and Non-Coordination Risks of Monetary and Macroprudential Authorities : A Robust Welfare Analysis

This study compares a central bank's leaning against the wind approach with a mix of monetary and macroprudential policies under parameter uncertainty in an estimated DSGE model with two financial frictions. We show that uncertainty of the economic environment is an essential constituent in the proper designing of macroprudential policy. Although coordination between monetary and macroprudential policies minimizes the policymakers' Bayesian risk, coordination and non-coordination risks threaten the goals of both authorities. Due to the trade-off in policy objectives, policymakers can achieve financial stability by limiting the volatility of policy instruments, thereby increasing inflation and output gap instability. The robust Bayesian macroeconomic rules show that when financial shocks hit the banking sector, a contractionary macroprudential policy should be combined with an expansionary monetary policy. However, if reverse entrepreneurial net worth and risk shocks strike the economy, such a conflict in macroeconomics policy instruments disappears, thus synchronizing both policies