A macroprudential stable funding requirement and monetary policy in a small open economy

Punnoose Jacob and Anella Munro

No DP2016/04, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: The Basel III net stable funding requirement, scheduled for adoption in 2018, requires banks to use a minimum share of long-term wholesale funding and deposits to fund their assets. This paper introduces a stable funding requirement (SFR) into a small open economy DSGE model featuring a banking sector with richly-specified liabilities. We estimate the model for New Zealand, where a similar requirement was adopted in 2010, and evaluate the implications of an SFR for monetary policy trade-offs. Altering the steady-state SFR does not materially affect the transmission of most structural shocks to the real economy and hence has little effect on the optimised monetary policy rules. However, a higher steady-state SFR level amplifes the effects of bank funding shocks, adding to macroeconomic volatility and worsening monetary policy trade-offs conditional on these shocks. We find that this volatility can be moderated if optimal monetary or prudential policy responds to credit growth.

Pages: 50 p.
Date: 2016-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-pr~, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (7)

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Working Paper: A macroprudential stable funding requirement and monetary policy in a small open economy (2016)
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