A macroprudential stable funding requirement and monetary policy in a small open economy

Punnoose Jacob and Anella Munro

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: The Basel III net stable funding requirement, scheduled for adoption in 2018, requires banks to use a minimum share of long-term wholesale funding and deposits to fund their assets. A similar regulation has been in place in New Zealand since 2010. This paper introduces the stable funding requirement (SFR) into a DSGE model featuring a banking sector with richly-specified liabilities, and estimates the model for New Zealand. We then evaluate the implications of an SFR for monetary policy trade-offs. Altering the steadystate SFR does not materially affect the transmission of most structural shocks to the real economy and hence has little effect on the optimised monetary policy rules. However, a higher steady-state SFR level amplifies the effects of bank funding shocks, adding to macroeconomic volatility and worsening monetary policy trade-offs conditional on these shocks. We find that this volatility can be moderated if optimal monetary or prudential policy responds to credit growth.

Keywords: DSGE models; prudential policy; monetary policy; small open economy; sticky interest rates; banks; wholesale funding (search for similar items in EconPapers)
JEL-codes: E31 E32 E44 F41 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2016-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac, nep-mon, nep-opm and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Working Paper: A macroprudential stable funding requirement and monetary policy in a small open economy (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2016-23

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