Ricerc@Sapienza

The Global Financial Crisis (GFC) led to a deep and long-lasting economic depression worldwide. The financial meltdown that followed the subprime crisis in the United States spreads rapidly, with dramatic consequences for the well-functioning of the global financial system. Therefore, several countries experienced huge costs in terms of output deterioration and unemployment rates. This project aims at answering the following question: how should the financial system oversight be organized in order to minimize social costs? The research question embraces two of the main challenges of the last decades of research, at both a theoretical and an empirical level: one is to test the interplay between macroprudential policy and monetary policy when they pursue financial stability. The second one is to deal with endogenous non-linearities of the economy which affect the policy conduct. The theoretical part will consist of a small-scale macroeconomic model with a non-linear state-space representation, where the Central Bank sets an optimal policy rate facing a convex Phillips curve and an IS curve with non-linear risk-premia and credit feedback. However, the model allows the presence of a financial authority which flags the creation of new loans in the banking system when credit dynamics exceeds its fundamental. Through numerical simulations the model will show how the Central Bank re-adjust the economy under both different macro scenarios and with a different degree of macroprudential policy. Then, the empirical part will consist of an estimation of the effects of a monetary policy shock where dynamic multipliers are allowed to change smoothly with the macroprudential stance. The challenge here will be twofold: one is to isolate the endogenous responses of the Central Bank to both macro financial imbalances and the second is to find a valuable strategy to represent different macroprudential regimes by exploiting observed macro data.