Why macroprudential policy matters in a monetary union. (23rd August 2021)

• Record Type: Journal Article
• Authors: Buch, Claudia M.; Buchholz, Manuel; Knoll, Katharina; Weigert, Benjamin
• Is Part Of: Oxford economic papers. Volume 73:Number 4(2021)
• Page Start: 1604
• Page End: 1633
• Publication Date: 2021-08-23
• Subjects: E58 -- E61 -- F45; Economics -- Periodicals; 330.05
• DOI: 10.1093/oep/gpab036
• Languages: English
• ISSNs: 0030-7653

Abstract

Abstract: This article discusses the role of macroprudential policy in a monetary union. It focuses on three main points. First, macroprudential policy has the objective of mitigating financial stability risks by preventing the build-up of vulnerabilities and increasing resilience. Second, many vulnerabilities reflect country-specific preferences and interact with national institutions. Monitoring and addressing financial stability risks at the national level are thus important. This holds particularly in a monetary union with economies that are highly integrated financially, but heterogeneous along important dimensions that can significantly affect financial stability risks. Third, cross-border externalities and spillovers call for the coordination of national macroprudential policies at the supranational level. This includes mechanisms to account for a potential inaction bias. Methodologically, the article draws on existing literature adding new empirical evidence on financial integration and adjustment to spillovers in the euro area.