Macroprudential and monetary policies to deal with inequality

This paper examines the impact of macro prudential policies on financial stability and inequality, focusing on the effects of debt service-to-income (DTI) ratio reductions and on its coordination with a conventional monetary policy. Using a macroeconomic simulation model, we find that reducing DTI threshold bring about a decrease in both households indebtedness and non-performing loans (NPLs), while causing economic contraction, and worsening inequality by restricting access to credit for lower-income households. Our findings suggest that while macro prudential policy (lower DTI) alone is able to grant more financial stability at the cost of greater inequality, a combination with expansionary monetary policies can reduce these disparities while ensuring financial stability. • This paper examines the impact of macro prudential policies on financial stability and inequality. • Reducing DTI brings about a decrease in both households’ indebtedness and non-performing loans (NPLs). • A concomitant expansionary monetary policy avoids economic contraction and worsening inequality. • The joint impact of expansionary monetary policy and macro prudential regulation allows to preserve financial stability and mitigating inequality.