Macroprudential policy implementation in a heterogeneous monetary union

Abstract

In this article, I develop a two-country new Keynesian general equilibrium model with housing and collateral constraints to explore how macroprudential policies should be conducted in a heterogeneous monetary union. I consider several types of cross-country heterogeneity: asymmetric shocks, different leveraged countries, and mortgage contract heterogeneity (fixed and variable rates). As a macroprudential tool, I propose a Taylor-type rule for the loan-to-value ratio, which responds to deviations in output and house prices. This policy can be applied at a national or union level. Results show that structural asymmetries matter for the implementation of macroprudential policies, especially when the heterogeneity delivers differences in economic and financial volatilities. It seems then adequate to delegate macroprudential policies to national authorities. However, a supranational institution could also help stabilize the whole union when there are asymmetric shocks.