When capital adequacy and interest rate policy are substitutes (and when they are not)

Stephen Cecchetti and Marion Kohler

No 379, BIS Working Papers from Bank for International Settlements

Abstract: Prudential instruments are commonly seen as the tools that can be used to deliver the macroprudential policy goals of reducing the frequency and severity of financial crises. And interest rates are traditionally viewed as the means to deliver the macroeconomic stabilisation goals of low, stable inflation and sustainable, stable growth. But, at the macroeconomic level, these two sets of policy tools have quite a bit in common. We use a simple macroeconomic model to study the extent to which capital adequacy requirements and interest rates might be substitutes in meeting the objective of stabilising the economy. We find that in our model both are substitutes for achieving conventional monetary policy objectives. In addition, we show that, in principle, they can both be used to meet financial stability objectives. This implies a need to coordinate the use of macroprudential and traditional monetary policy tools, a need that has clear implications for the construction of the policy framework designed to deliver the joint objectives of macroeconomic and financial stability.

Keywords: Monetary policy; capital adequacy policy; financial stability policy (search for similar items in EconPapers)
Pages: 22 pages
Date: 2012-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (37)

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Related works:
Journal Article: When Capital Adequacy and Interest Rate Policy Are Substitutes (And When They Are Not) (2014)
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