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New instruments for banking regulation and monetary policy after the crisis

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  • Daniel Detzer

    ()
    (Berlin School of Economics and Law,Germany)

Abstract

This paper analyzes two instruments - asset-based reserve requirements put forward by Thomas Palley and asset-based capital requirements proposed by Charles Goodhart and Avinash Persaud - regarding their merits in reducing excessive asset price inflation. A theoretical framework of asset pricing based on the ideas of Keynes and Minsky is developed, within which the working of the instruments is demonstrated and analyzed. It is shown that in theory both instruments are able to reduce excessive asset price inflation by reducing the amount of credit money and investment flowing from financial institutions into a booming sector. It is concluded that the effect of asset-based reserve requirements is more predictable and that those are therefore more suitable for the task.

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Bibliographic Info

Article provided by Edward Elgar in its journal Intervention. European Journal of Economics and Economic Policies.

Volume (Year): 9 (2012)
Issue (Month): 2 ()
Pages: 333-254

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Handle: RePEc:elg:ejeepi:v:9:y:2012:i:2:p233-254

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Web page: http://www.elgaronline.com/ejeep

Related research

Keywords: Monetary policy; banking regulation; asset prices; bubbles; Minsky; financial instability hypothesis; asset based reserve requirements; capital require- ments; macroprudential regulation;

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References

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  1. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-15, March.
  2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  3. Thomas Palley, 2007. "Asset-based Reserve Requirements: A Response," Review of Political Economy, Taylor & Francis Journals, vol. 19(4), pages 575-578.
  4. Thomas I. Palley, 2008. "Asset Price Bubbles and Monetary Policy: Why Central Banks Have Been Wrong and What Should Be Done," IMK Working Paper 05-2008, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  5. Skander J. Van den Heuvel, 2002. "Does bank capital matter for monetary transmission?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 259-265.
  6. Admati, Anat R. & DeMarzo, Peter M. & Hellwig, Martin F. & Pfleiderer, Paul, 2010. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity Is Not Expensive," Research Papers 2065, Stanford University, Graduate School of Business.
  7. Thomas Palley, 2004. "Asset-based reserve requirements: reasserting domestic monetary control in an era of financial innovation and instability," Review of Political Economy, Taylor & Francis Journals, vol. 16(1), pages 43-58.
  8. L. Randall Wray & Eric Tymoigne, 2008. "Macroeconomics Meets Hyman P. Minsky: The Financial Theory of Investment," Economics Working Paper Archive wp_543, Levy Economics Institute.
  9. Jan Kregel, 2008. "Using Minsky's Cushions of Safety to Analyze the Crisis in the U. S. Subprime Mortgage Market," International Journal of Political Economy, M.E. Sharpe, Inc., vol. 37(1), pages 3-23, April.
  10. Michal Kowalik, 2011. "Countercyclical capital regulation: should bank regulators use rules or discretion?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II.
  11. Goodhart, Charles & Hofmann, Boris, 2006. "House Prices and the Macroeconomy: Implications for Banking and Price Stability," OUP Catalogue, Oxford University Press, number 9780199204595.
  12. Thomas Palley, 2003. "Asset Price Bubbles and the Case for Asset-Based Reserve Requirements," Challenge, M.E. Sharpe, Inc., vol. 46(3), pages 53-72, May.
  13. Hyman P. Minsky, 1992. "The Financial Instability Hypothesis," Economics Working Paper Archive wp_74, Levy Economics Institute.
  14. Bailey,Roy E., 2005. "The Economics of Financial Markets," Cambridge Books, Cambridge University Press, number 9780521612807, October.
  15. Adrian, T. & Shin, H S., 2008. "Liquidity and financial contagion," Financial Stability Review, Banque de France, issue 11, pages 1-7, February.
  16. Korkut A. Erturk, 2006. "Speculation, Liquidity Preference, and Monetary Circulation," Economics Working Paper Archive wp_435, Levy Economics Institute.
  17. Peter Hördahl & Michael R King, 2008. "Developments in repo markets during the financial turmoil," BIS Quarterly Review, Bank for International Settlements, December.
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