Capital regulation and monetary policy with fragile banks

Ignazio Angeloni () and Ester Faia

Journal of Monetary Economics, 2013, vol. 60, issue 3, 311-324

Abstract: Optimizing banks subject to runs are introduced in a macro model to study the transmission of monetary policy and its interplay with bank capital regulation when banks are risky. A monetary expansion and a positive productivity shock increase bank leverage and risk. Risk-based capital requirements amplify the cycle and are welfare detrimental. Within a class of simple policy rules, the best combination includes mildly anticyclical capital ratios (as in Basel III) and a response of monetary policy to asset prices or bank leverage.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:60:y:2013:i:3:p:311-324

DOI: 10.1016/j.jmoneco.2013.01.003

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