Macroprudential regulation, credit spreads and the role of monetary policy

William Tayler () and Roy Zilberman

No 599, Bank of England working papers from Bank of England

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)
Pages: 32 pages
Date: 2016-04-29
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-pr~, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (46)

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Journal Article: Macroprudential regulation, credit spreads and the role of monetary policy (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0599

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