Macroprudential regulation, credit spreads and the role of monetary policy

William Tayler () and Roy Zilberman

Journal of Financial Stability, 2016, vol. 26, issue C, 144-158

Abstract: We study the macroprudential roles of bank capital regulation and monetary policy in a borrowing cost channel model with endogenous financial frictions, driven by credit risk, bank losses and bank capital costs. These frictions induce financial accelerator mechanisms and motivate the examination of a macroprudential toolkit. Following credit shocks, countercyclical regulation is more effective than monetary policy in promoting price, financial and macroeconomic stability. For supply shocks, combining macroprudential regulation with a stronger anti-inflationary policy stance is optimal. The findings emphasize the importance of the Basel III accords in alleviating the output-inflation trade-off faced by central banks, and cast doubt on the desirability of conventional (and unconventional) Taylor rules during periods of financial distress.

Keywords: Basel III – macroprudential policy; Bank capital; Monetary policy; Borrowing cost channel; Welfare (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 E58 G28 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (41)

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Working Paper: Macroprudential regulation, credit spreads and the role of monetary policy (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:26:y:2016:i:c:p:144-158

DOI: 10.1016/j.jfs.2016.08.001

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