Macroprudential policy coordination in a currency union

Using a game-theoretic approach, the benefits of macroprudential policy coordination are evaluated in two-country model currency union with financial frictions. The gains from measured by comparing outcomes under centralized regime, where common regulator sets tax on loans to maximize union-wide welfare, and decentralized each independently own-country welfare. Numerical experiments show that, response shocks, involves increased activism country shock originates ( keeping one’s house order ). However, while positive when country-specific instrument rules set, one-size-fits-all makes worse off member countries asymmetric size structure. Under both regimes, getting monetary lean aggressively against cycle may be suboptimal. broad implications analysis for central bank’s mandate euro area also discussed.