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Stabilization Policy and Boom-Bust Cycles - Monetary and Macro-Prudential Rules
Maria Tereza Punzi
The recent financial crisis has posed a challenge to the conduct of financial stability and monetary policy. The international debate mainly focused on the potential benefits of reducing pro-cyclicality in financial intermediation in order to avoid boom and bust cycles in the supply of credit. We study the stabilization benefits of macro-prudential and monetary policy rules that react to an indicator of financial imbalances. In particular, we investigate the benefits of dampening credit cycles and explore the effectiveness of alternative policy instruments, such as the interest rate and the loan to value for macroeconomic and financial stabilization. We find that indeed it is appropriate to react to financial imbalances indicators, but such reaction should preferably be undertaken by macro-prudential instruments.