Is a loan tax optimal in the presence of leaning against the loan wind policy?

Abstract

This thesis aims to figure out an optimal combination of monetary policy tools and macroprudential tools in order to maintain both financial stability and price stability. In particular, given that monetary policy authority already considers loan growth in its objective function, it asks whether an additional macroprudential tool, a loan tax, is welfare-improving. For this purpose, it constructs a simple New Keynesian Model with capital and banking sector. By incorporating loan growth in a loss function, monetary policy authority chooses the optimum weights and derives a Taylor-type interest rate rule, which could be also called as leaning against the credit winds. Then, it adds an endogenous tax rule and compares the minimum mean values of loss function. The result of simulations suggest that a tax rule that responses to deviations from steady state value of growth, inflation and loan growth leads lower loss values, thus, the inclusion of tax in the policy rule set is welfareimproving