Monetary Policy and Macroprudential Regulation with Financial Frictions
An integrated analysis of how financial frictions can be accounted for in macroeconomic models built to study monetary policy and macroprudential regulation.
Since the global financial crisis, there has been a renewed effort to emphasize financial frictions in designing closed- and open-economy macroeconomic models for monetary and macroprudential policy analysis. Drawing on the extensive literature of the past decade as well as his own contributions, in this book Pierre-Richard Agénor provides a unified set of theoretical and quantitative macroeconomic models with financial frictions to explore issues that have emerged in the wake of the crisis. These include the need to understand better how the financial system amplifies and propagates shocks originating elsewhere in the economy; how it can itself be a source of aggregate fluctuations; the extent to which central banks should account for financial stability considerations in the conduct of monetary policy; whether national central banks and regulators should coordinate their policies to promote macroeconomic and financial stability; and how much countercyclical macroprudential policies should be coordinated at the international level to mitigate financial spillovers across countries.
Agénor focuses on upper middle-income countries, which differ from advanced economies in terms of both their structural features (which include a financial sector dominated by banks, weak supervisory capacity, and a high degree of vulnerability to external shocks) and their long-standing policy challenges (such as managing volatile capital flows). Some of the analytical insights and broad policy lessons that can be drawn from the book will be of relevance to advanced economies as well.
This is a treatise/textbook that the profession badly needs. It focuses on financial frictions and burning issues of the day. It will be especially valuable for graduate students who are keen on making their marks on this challenging field.
Guillermo A. Calvo, Professor of International and Public Affairs, Columbia University; former Chief Economist at the Inter-American Development Bank; and author of Macroeconomics in Times of Liquidity Crises
Pierre-Richard Agénor has produced the most complete and comprehensive treatment of the effects of macroprudential policies in a general-equilibrium context of which I am aware. The beauty of this book is that it explores that role in a sequence of models ranging from simple closed-economy reduced-form versions to state-of-the-art open-economy DSGEs with financial frictions, each lucidly developed and intuitively explained. This innovative approach makes the general-equilibrium effects of a variety of macroprudential policy instruments transparent and easy to understand. Agénor's book is likely to become a standard reference in the literature on macro-financial linkages and regulatory policies intended to avoid aggregate financial fragility. It belongs on the bookshelf of any student or researcher concerned with these topics.
Peter J. Montiel, Professor of Economics, Williams College