Interaction of Macroprudential and Monetary Policies: Practice Ahead of Theory

This paper examines how monetary and macroprudential policies interact and possibly complement each other in achieving their respective price and financial stability objectives. We first review the Canadian experience of housing market cycles and highlight the need to coordinate the two sets of policies. Then, to deepen our understanding of policy interactions, we discuss current research work being done at the Bank of Canada and recent studies in the literature. Finally, for central bank and academic researchers, we emphasize remaining gaps in developing a modelling framework that unifies both price and financial stability objectives with explicit interactions between monetary and macroprudential policies.