Monetary policy and capital regulation in the US and Europe

Ethan Cohen-Cole and Jonathan Morse

International Economics, 2013, issue 134, 56-77

Abstract: The Federal Reserve and the European Central Bank aggressively lowered interest rates during the recent crisis. Both actions were at odds with an anti-inflationary policy stance: in August 2007, inflation expectations were high, particularly in the United States. To explain these actions, we model an economy with a leveraged and regulated financial sector. We find optional Taylor rules using simulated GMM, and find rules consistent with a pro-inflationary reaction during financial crises and a standard output-inflation mandate for the central bank. Our results support procyclical regulation not because of adequacy concerns, but instead due to the impact on monetary policy.

Keywords: Monetary policy; Bank regulation; European Central Bank (search for similar items in EconPapers)
JEL-codes: E51 E58 G18 G28 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:cii:cepiie:2013-q2-134-4

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