Mercredi | 2014-11-26
salle B103, 12h-14h

Armand FOUEJIEU AZANGUE – Alexandra POPESCU

The leaning against the wind strategy in which the central bank responds to financial imbalances when setting its policy interest rate has been advocated in the aftermath of the recent financial crisis. While such a strategy can generate trade-offs between policy objectives, macroprudential frameworks are discussed in current debates as the most appropriated approaches to cope with financial instability. In response to financial risks, this paper investigates the performances of various policy strategies in improving both financial and macroeconomic stability. The analysis relies on a hybrid formulation of the three-equation New Keynesian model. This standard model is supplemented with a set of equations describing a banking sector, and an endogenous asset price bubble equation which captures the risk in the financial sector, with the underlying assumption that credit supply feeds the bubble and increases financial instability. Therefore, a macroprudential instrument is set to control the bank loan supply. One of the main conclusions of the paper is that, a two-pillar framework in which in addition to the setting up of the macroprudential instrument the central bank leans against the wind, provides the best stabilization outcome.