Macroprudential Regulation and the Role of Monetary Policy

William Tayler () and Roy Zilberman

No 37, Dynare Working Papers from CEPREMAP

Abstract: This paper examines the macroprudential roles of bank capital regulation and monetary policy in a Dynamic Stochastic General Equilibrium model with endogenous financial frictions and a borrowing cost channel. We identify various transmission channels through which credit risk, commercial bank losses, monetary policy and bank capital requirements affect the real economy. These mechanisms generate significant financial accelerator effects, thus providing a rationale for a macroprudential toolkit. Following credit shocks, countercyclical bank capital regulation is more effective than monetary policy in promoting financial, price and overall macroeconomic stability. For supply shocks, macroprudential regulation combined with a strong response to inflation in the central bank policy rule yield the lowest welfare losses. The findings emphasize the importance of the Basel III regulatory accords and cast doubt on the desirability of conventional Taylor rules during periods of financial distress.

Keywords: Bank Capital Regulation; Macroprudential Policy; Basel III; Monetary Policy; Borrowing Cost Channel (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 E58 G28 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2014-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Macroprudential regulation and the role of monetary policy (2014)
Working Paper: Macroprudential Regulation and the Role of Monetary Policy (2014)
Working Paper: Macroprudential Regulation and the Role of Monetary Policy (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:cpm:dynare:037

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