Countercyclical Bank Capital Requirement and Optimized Monetary Policy Rules

Carlos de Resende, Ali Dib, René Lalonde and Nikita Perevalov

Staff Working Papers from Bank of Canada

Abstract: Using BoC-GEM-Fin, a large-scale DSGE model with real, nominal and financial frictions featuring a banking sector, we explore the macroeconomic implications of various types of countercyclical bank capital regulations. Results suggest that countercyclical capital requirements have a significant stabilizing effect on key macroeconomic variables, but mostly after financial shocks. Moreover, the bank capital regulatory policy and monetary policy interact, and this interaction is contingent on the type of shocks that drive the economic cycle. Finally, we analyze loss functions based on macroeconomic and financial variables to arrive at an optimal countercyclical regulatory policy in a class of simple implementable Taylor-type rules. Compared to bank capital regulatory policy, monetary policy is able to stabilize the economy more efficiently after real shocks. On the other hand, financial shocks require the regulator to be more aggressive in loosening/tightening capital requirements for banks, even as monetary policy works to counter the deviations of inflation from the target.

Keywords: Economic models; Financial Institutions; Financial stability; International topics (search for similar items in EconPapers)
JEL-codes: E32 E44 E5 G1 G2 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Journal Article: Countercyclical Bank Capital Requirement and Optimized Monetary Policy Rules (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:13-8

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