<p>We build a workhorse New Keynesian policy model with partially anchored inflation expectations, augmented with simple behavioural assumptions about banks and the credit market, to assess the dynamic performance of an economy in the face of transitory financial shocks, under different assumptions about the interactions between monetary and macroprudential policy. We show that the banks’ capital adequacy ratio enters the demand multiplier and interferes with monetary policy according to the institutional arrangement between macroprudential and monetary policies and the degree of anchoring of inflation expectations to the central bank’s target. With strongly anchored inflation expectations, the setup of a macroprudential authority to oversee financial stability pays out, independently of the degree of cooperation between the two authorities. With weakly anchored inflation expectations, cooperation between monetary and macroprudential policy delivers the best stabilization outcome if shocks are moderately persistent. If shocks are highly persistent, a leaning against the wind monetary policy dominates, unless the macroprudential policy toolset includes countercyclical capital buffers. Hence cooperation between the Central Bank and the macroprudential regulator can be the always-dominant institutional arrangement if the financial regulator is allowed to use more than one policy instrument when needed.</p>