Monetary and Macroprudential Policy in a Leveraged Economy


Jean-Marc Natal

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2011-15 | April 1, 2015

We examine the optimal monetary policy in the presence of endogenous feedback loops between asset prices and economic activity. We reconsider this issue in the context of the financial accelerator model and when macroprudential policies can be pursued. Absent macroprudential policy, we first show that the optimal monetary policy leans considerably against movements in asset prices and risk premia. We show that the optimal policy can be closely approximated and implemented using a speed-limit rule that places a substantial weight on the growth of financial variables. An endogenous feedback loop is crucial for this result, and price stability is otherwise quasi-optimal. Similarly, introducing a simple macroprudential rule that links reserve requirements to credit growth dampens the endogenous feedback loop, leading the optimal monetary policy to focus on price stability.

Article Citation

Natal, Jean-Marc, and Sylvain Leduc. 2011. “Monetary and Macroprudential Policy in a Leveraged Economy,” Federal Reserve Bank of San Francisco Working Paper 2011-15. Available at

About the Author
Sylvain Leduc
Sylvain Leduc is executive vice president and director of Economic Research at the Federal Reserve Bank of San Francisco. Learn more about Sylvain Leduc