 Optimal banking regulation and monetary policyTai-Wei Hu, Yiting Li and Yilei Liu European Economic Review, 2025, vol. 178, issue C Abstract: In a money-search model with deposits as means of payment where banks are subject to limited commitment, we study optimal monetary policy in terms of interest on reserves and inflation, and optimal banking regulations with fiscal constraints on the central bank. The optimal design of banking regulations and monetary policy depends on the amount of productive assets used as collateral for bank deposit issuance and the fiscal requirement. In general, IOER can increase liquidity provision and hence enhance welfare, but it requires fiscal resources to do so, and an appropriate reserve requirement can increase both liquidity and fiscal revenue. This gives a novel channel to improve welfare through banking regulation. However, a positive nominal IOER can also be useful for fiscal purposes under relatively high inflation. For a given level of fiscal requirement, higher welfare is implemented with the consumer’s bargaining power less than one. As consumers hold more deposits for conducting trade, this may raise the tax base, enable less stringent banking regulations, and enhance welfare. Keywords: Monetary policy; Reserves requirement; Banking regulations (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:178:y:2025:i:c:s0014292125001606 DOI: 10.1016/j.euroecorev.2025.105110 Access Statistics for this article European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer More articles in European Economic Review from Elsevier |
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