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International Finance and Accounting

Abstract

This paper analyzes the impact of expansionary financial shock on the economy using a dynamic stochastic general equilibrium model. According to the analysis, the coordinated implementation of monetary and macroprudential policies reduces the negative impact of the expansionary financial shock. Even though tightening macroprudential policies during economic expansion periods decreases production volume it will increase stability of financial system. Monetary policy has a negative impact on financial stability through transmission mechanisms, and counter-cyclical instruments of macroprudential policy play an important role in mitigating these negative effects. This is because counter cyclical instruments have a positive impact on the faster recovery of the economy during periods of economic downturn.

References

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