A Primer on Macroprudential Policy

This paper introduces macroprudential policy using a static New Keynesian Macroeconomics model with financial frictions. We analyze two related questions: First, we show how the pro cyclicality of financial factors captured by the financial accelerator amplifies the transmission of supply and demand shocks and impacts the intuition we get from a basic intermediate macroeconomics. Second, adopting an optimal policy perspective, we show how a policymaker may use macroprudential policy to complete monetary policy measures. Following the Mundellian Policy Assignment principle, macroprudential policy should be specialized to address the pro cyclicality problem to suppress welfare losses associated with the building of financial imbalances, thus helping monetary policy to concentrate on the output inflation trade-off