Interactions and Coordination between Monetary and Macro-prudential Policies

I study monetary and macro-prudential policy intervention in a general equilibrium economy with recurrent boom-bust cycles. Recurrence causes forward-looking variables to also react to policy intervention during phases in which the intervention is inactive. Macro-prudential policies that contain systemic risk in financial markets during booms, therefore, relax market-based funding constraints during busts, which helps mitigate the severity and shorten the duration of economic meltdowns. Contractionary monetary interventions during booms also have (latent) beneficial effects during busts. Coordination between the two policy instruments improves social welfare over standard, non-coordinated policy interventions, but improvement is moderate