Macroprudential regulation and the role of monetary policy

William Tayler () and Roy Zilberman

No 63933064, Working Papers from Lancaster University Management School, Economics Department

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.

Date: 2014
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac, nep-mon and nep-reg
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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:lan:wpaper:63933064

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