Capital Regulation, Monetary Policy and Financial Stability

Pierre-Richard Agénor, Koray Alper and Luiz Awazu Pereira da Silva ()

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: This paper examines the roles of bank capital regulation and monetary policy in mitigating procyclicality and promoting macroeconomic and financial stability. The analysis is based on a dynamic stochastic model with imperfect credit markets. Macroeconomic stability is defined in terms of a weighted average of inflation and output gap volatility, whereas financial stability is defined in terms of three alternative indicators (real house prices, the credit-to-GDP ratio, and the loan spread), both individually and in combination. Numerical experiments associated with a housing demand shock show that in a number of cases, even if monetary policy can react strongly to inflation deviations from target, combining a credit-augmented interest rate rule and a Basel III-type countercyclical capital regulatory rule may be optimal for promoting overall economic stability. The greater the degree of policy interest rate smoothing, and the stronger the policymaker�s concern with financial stability, the larger is the sensitivity of the regulatory rule to credit growth gaps.

Keywords: Financial Stability; Credit; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E44 E51 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN ... g+Paperss/2012/12-28 (application/pdf)

Related works:
Journal Article: Capital Regulation, Monetary Policy, and Financial Stability (2013)
Working Paper: Capital Regulation, Monetary Policy and Financial Stability (2011)
Working Paper: Capital Regulation, Monetary Policy and Financial Stability (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1228

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