Abstract
The paper develops a model to examine the implications of the financial supervisory architecture on macroeconomic outcomes and social welfare, highlighting the role of policy instruments and types of macroeconomic shocks. In the static version of the model, it is shown that assigning the mandates of monetary and financial stability to two separate policymakers can only promote welfare when some coordination exists between the policymakers, and it is the welfare dominant arrangement when financial stability is socially important. In a dynamic framework, separation of mandates is the welfare dominant setting regardless of the social preferences between the two objectives. Coordination between the policymakers is the preferred structure when the volatility of macroeconomic variables influences social welfare.