Authors : Yong Min Kim(the Bank of Korea), Jung Yeoun Lee(the Bank of Korea)

Abstract

 For the maximization of the social welfare, it is critical to choose an optimal coordination between monetary and macroprudential policies depending on the phase of business and financial cycles in which the current economy is placed. In this context, we examine a conceptual framework of operation of monetary and macroprudential policies considering business and financial cycles. 
 In general, it is known that monetary policy is better suited for stabilizing the real economic fluctuations while macroprudential policy for preserving financial stability. However, the use of each policy needs to consider the effects from monetary policy on financial stability and from macroprudential policy on real economic stability.
When business and financial cycles are in the same phase, it is desirable for each policy to be implemented with a lower intensity than the case where monetary and macroprudential policies target business and financial cycles respectively. On the contrary, when business and financial cycles are in the different phase, each policy should be performed with a greater intensity.