Cooperation between monetary and macroprudential policy boosts economic stability.
The article explores how cooperation between monetary and macroprudential policies affects an economy's response to demand and financial shocks. By analyzing a model with inflation expectations and bank behavior, the study finds that cooperation is most effective when shocks are moderately persistent. However, if shocks become more persistent, independent policies or a leaning against the wind approach may be better. Including a counter-cyclical capital buffer in macroprudential policy can improve stabilization outcomes.