Tayler, William and Zilberman, Roy (2014): Macroprudential Regulation and the Role of Monetary Policy.
Preview |
PDF
MPRA_paper_54885.pdf Download (512kB) | Preview |
Abstract
This paper examines the macroprudential roles of bank capital regulation and monetary policy in a Dynamic Stochastic General Equilibrium model with endogenous financial frictions and a borrowing cost channel. We identify various transmission channels through which credit risk, commercial bank losses, monetary policy and bank capital requirements affect the real economy. These mechanisms generate significant financial accelerator effects, thus providing a rationale for a macroprudential toolkit. Following credit shocks, countercyclical bank capital regulation is more effective than monetary policy in promoting financial, price and overall macroeconomic stability. For supply shocks, macroprudential regulation combined with a strong response to inflation in the central bank policy rule yield the lowest welfare losses. The findings emphasize the importance of the Basel III regulatory accords and cast doubt on the desirability of conventional Taylor rules during periods of financial distress.
| Item Type: | MPRA Paper |
|---|---|
| Original Title: | Macroprudential Regulation and the Role of Monetary Policy |
| Language: | English |
| Keywords: | Bank Capital Regulation, Macroprudential Policy, Basel III, Monetary Policy, Cost Channel. |
| Subjects: | E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation |
| Item ID: | 54885 |
| Depositing User: | Dr Roy Zilberman |
| Date Deposited: | 03 Apr 2014 04:11 |
| Last Modified: | 28 Sep 2019 15:20 |
| References: | Agénor, P.R. and J. Aizenman (1998), "Contagion and Volatility with Imperfect Credit Markets", IMF Staff Papers, 45, 207-235. Agénor, P.R., K. Alper and L.P. Da Silva (2013), "Capital Regulation, Monetary Policy and Financial Stability", International Journal of Central Banking, 9(3),198-243. Agénor, P.R., G.J. Bratsiotis and D. Pfaifer (2013), "Credit Frictions, Collateral and the Cyclical Behaviour of the Finance Premium", Macroeconomic Dynamics (forthcoming). Aguiar, A. and I. Drumond (2009), "Business Cycle and Bank Capital: Monetary Policy Transmission under the Basel Accords", FEP Working paper No. 242, University of Porto. Angelini, P., S. Neri and F. Panetta (2012), "Monetary and Macroprudential Policies", Working Paper Series 1449, European Central Bank. Angeloni, I. and E. Faia (2013), "Capital Regulation and Monetary Policy with Fragile Banks", Journal of Monetary Economics, 60, 311-324. Barth, J., G. Caprio and R. Levine (2004), "Bank Regulation and Supervision: What Works Best", Journal of Financial Intermediation, 12, 205--248 Basel Committee on Banking Supervision (1988), "International Convergence of Capital Measurement and Capital Standards", Bank for International Settlements-Basle Committee on Banking Supervision Publications. Basel Committee on Banking Supervision (2004), "International Convergence of Capital Measurement and Capital Standards - A Revised Framework", Bank for International Settlements - Basle Committee on Banking Supervision Publications. Basel Committee on Banking Supervision (2011), "Basel III: A Global Regulatory Framework for more Resilient Banks and Banking Systems", Report No. 189. Basel Committee on Banking Supervision (2012), "Models and Tools for Macroprudential Analysis", Working Paper No. 21, Bank for International Settlements. Benes, J., and M. Kumhof (2011), "Risky Bank Lending and Optimal Capital Adequacy Regulation", IMF Working Paper WP/11/130, International Monetary Fund. Bernanke, B., M. Gertler and S. Gilchrist (1999), "The Financial Accelerator in a Quantitative Business Cycle Framework", In J.B. Taylor and M. Woodford (Eds), Handbook of Macroeconomics, Vol. 1C, 1341-1393, Amsterdam, North Holland (Elsevier). Bratsiotis, G.J., W. Tayler and R. Zilberman (2014), "Financial Regulation, Credit and Liquidity Policy and the Business Cycle", work in progress. Calvo, G.A. (1983), "Staggered Prices in a Utility-Maximizing Framework", Journal of Monetary Economics, 12, 383-398. Chowdhury, I., M. Hoffmann and A. Schabert (2006), "Inflation Dynamics and the Cost Channel of Monetary Transmission", European Economic Review, 50(4),995--1016. Christiano, L.J., M. Eichenbaum and C. Evans (2005), "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy", Journal of Political Economy, 113, 1-45. Christiano, L.J., R. Motto and M. Rostagno (2013), "Risk Shocks", NBER Working Paper No. 18682, National Bureau of Economic Research. Christensen, I., C. Meh and K. Moran (2011), "Bank Leverage Regulation and Macroeconomic Dynamics", Bank of Canada Working Paper no. 2011-32, Bank of Canada. Coleman, A. D., N. Esho and I.G. Sharpe (2006), "Does Bank Monitoring Influence Loan Contract Terms?", Journal of Financial Services Research, 30(2), 177-198. Covas, F. and S. Fujita (2010), "Procyclicality of Capital Requirements in a General Equilibrium Model of Liquidity Dependence", International Journal of Central Banking, 6(4), 137-173. Cúrdia, V. and M. Woodford (2010), "Credit Spreads and Monetary Policy", Journal of Money, Credit and Banking, 42(s1), 3-35. DiCecio, R. (2009), "Sticky Wages and Sectoral Labor Comovement", Journal of Economic Dynamics and Control, 33(3), 538-553. Dixit, A. and J. Stiglitz (1977), "Monopolistic Competition and Optimum Product Diversity", American Economic Review, 67, 297-308. Erceg, C.J., D. Henderson and A. T. Levin (2000), "Optimal Monetary Policy with Staggered Wage and Price Contracts", Journal of Monetary Economics, 46, 281--313. Faia, E. and T. Monacelli (2007), "Optimal Interest Rate Rules, Asset Prices and Credit Frictions", Journal of Economic Dynamics and Control, 31, 3228-3254. Fernandez-Corugedo, E., M. McMahon, S. Millard, and L. Rachel (2011), "Understanding the Macroeconomic Effects of Working Capital in the United Kingdom", Bank of England Working Paper No. 422, Bank of England. Fiore, F. D., and O. Tristani (2013), "Optimal Monetary Policy in a Model of the Credit Channel", The Economic Journal, 123(571), 906--931 Fonseca, A. R., F. Gonzalez and L. Pereira da Silva (2010), "Cyclical Effects of Bank Capital Buffers with Imperfect Credit Markets: International Evidence", Working Paper Series No. 216, Banco Central do Brasil. Gerali, A., S. Neri, L. Sessa and F.M. Signoretti (2010), "Credit and Banking in a DSGE model of the Euro Area", Journal of Money, Credit and Banking, 42(s1), 107-141. Gertler, M. and P. Karadi (2011), "A Model of Unconventional Monetary Policy", Journal of Monetary Economics 58(1), 17-34. Gertler, M. and N. Kiyotaki (2010), "Financial Intermediation and Credit Policy in Business Cycle Analysis", In B. Friedman, and M. Woodford (Eds), Handbook of Monetary Economics, Vol 3, Chapter 11, 547-599, North Holland (Elsevier). Gilchrist, S., R. Schoenle, J. Sim and E. Zakrajsek (2014), "Inflation Dynamics During the Financial Crisis", Unpublished Manuscript, Brandeis University. Glocker, C. and P. Towbin (2012), "Reserve Requirements for Price and Financial Stability: When Are They Effective", International Journal of Central Banking, 8(1), 65-113. Jermann, U. and V. Quadrini (2012), "Macroeconomic Effects of Financial Shocks", The American Economic Review, 102(2), 1186-1186. Kannan, P., P. Rabanal and A. Scott (2012), "Monetary and Macroprudential Policy Rules in a Model with House Price Booms", The B.E. Journal of Macroeconomics, 12(1), Article 16. Kaufmann, S. and J. Scharler (2009), "Financial Systems and the Cost Channel Transmission of Monetary Policy Shocks", Economic Modelling, 26(1), 40-46. Liu, G. and N.E. Seeiso (2012), "Basel II Procyclicality: The Case of South Africa", Economic Modelling, 29(3), 848-857. Markovic, B. (2006), "Bank Capital Channels in the Monetary Transmission Mechanism", Bank of England Working Paper No. 313. Meh, C. and K. Moran (2010), "The Role of Bank Capital in the Propagation of Shocks", Journal of Economic Dynamics and Control, 34(3), 555-576. N'Diaye, P. (2009), "Countercyclical Macroprudential Policies in a Supporting Role to Monetary Policy", IMF Working Paper No. 257, International Monetary Fund. Nolan, C. and C. Thoenissen (2009), "Financial Shocks and the US Business Cycle", Journal of Monetary Economics, 56(4), 596-604. Pfaifer, D. and E. Santoro (2013), "Credit Market Distortions, Asset Prices and Monetary Policy," Macroeconomic Dynamics (forthcoming). Rabanal, P. (2007), "Does Inflation Increase after a Monetary Policy Tightening? Answers Based on an Estimated DSGE Model", Journal of Economic Dynamics and Control, 31, 906-37. Ravenna, F. and C. E. Walsh (2006), "Optimal Monetary Policy with the Cost Channel", Journal of Monetary Economics, 53, 199-216. Saurina, J. (2009), "Dynamic Provisioning: The Experience of Spain", Crisis Response Note No. 7, International Finance Corporation. Schmitt-Grohe, S. and M. Uribe (2007), "Optimal Simple and Implementable Monetary and Fiscal Rules", Journal of Monetary Economics, 54(6), 1702--1725. Smets, F. and R. Wouters (2003), "An Estimated Stochastic General Equilibrium Model of the Euro area", Journal of the European Economic Association, 1(5), 1123-1175. Smets, F. and R. Wouters (2007), "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach", The American Economic Review, 97(3), 586-606. Suh, H. (2014), "Dichotomy between Macroprudential Policy and Monetary Policy on Credit and Inflation", Economics Letters, 122(2), 144-149. Taylor, J.B. (1993), "Discretion versus Policy Rules in Practice", Carnegie-Rochester Conference Series on Public Policy, 39, 195-214. Tillmann, P. (2008), "Do Interest Rates Drive Inflation Dynamics? An Analysis of the Cost Channel of Monetary Transmission", Journal of Economic Dynamics and Control, 32, 2723-2744. Walsh, C. E. (2003), "Monetary Theory and Policy", MIT Press. Zilberman, R. (2013), "Essays on Banking Regulation, Macroeconomic Dynamics and Financial Volatility", PhD Thesis, University of Manchester. |
| URI: | https://mpra.ub.uni-muenchen.de/id/eprint/54885 |
All papers reproduced by permission. Reproduction and distribution subject to the approval of the copyright owners.
| View Item |