Capital Requirements in Light of Monetary Tightening

Aur lien Espic, Lisa Kerdelhu and Julien Matheron

Working papers from Banque de France

Abstract: This paper studies the role of capital requirements in a context of monetary tightening. We build a new Keynesian model featuring costly defaults for banks, households and firms, and estimate it on Euro Area data between 2002 and 2023. We first identify the sources of this unprecedented episode before studying its propagation along financial variables. We then build various counterfactuals to assess how capital requirements have affected the transmission of this shock. We find that although capital requirements reduced the post-Covid expansion, they preserved macroeconomic stability by reducing banks probability of default. More generally, we show that capital requirements do not need to be countercyclical to be efficient: in an inflationary context, they act as automatic stabilizers, by limiting the amplitude of expansionary as well as recessionary shocks.

Keywords: Monetary Tightening; Financial Stability; Macroprudential Policy. (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 G28 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2024
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:947

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