In Search of Targeting Rules for Monetary and Macroprudential Policy

This paper examines jointly optimal monetary and macroprudential policies through the lens of targeting rules that are both implementable and optimal. Based on a DSGE framework that features nominal rigidity, housing, and an incomplete financial market, our targeting rules outperform an optimal Taylor-type rule-based policy framework in terms of welfare outcome. The policy implications of our targeting rules are robust to alternative assumptions of policy adjustment cost and strategic interactions between policymakers. Additionally, our targeting rules demonstrate that both monetary and macroprudential policies assign the top-most priority to inflation stabilization