A macroprudential stable funding requirement and monetary policy in a small open economy
Punnoose Jacob () and
CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University
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)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac, nep-mon, nep-opm and nep-pke
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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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