Stabilization and the Policy Mix in a Monetary Union

The need for macroprudential policy to “lean against the wind” of credit cycles at the aim of financial and hence macroeconomic stability is a common belief. Which design of macroprudential policy might attain the greatest stability for the economy is still an open debate. This paper builds a two-country DSGE model for a monetary union and analyzes, through different macroprudential scenarios, the response of the main variables to an asymmetric credit risk shock. When national macroprudential policies are implemented, macroeconomic and financial stability is reached in both countries, mainly due to the cancellation of the private-public debt channel. When macroprudential policies are supranational, macroeconomic stability is higher in the country that suffers the shock while the other country is destabilized, mainly due to the open economy channel.