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Countercyclical Bank Capital Requirement and Optimized Monetary Policy Rules

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Author Info

  • Carlos De Resende
  • Ali Dib
  • René Lalonde
  • Nikita Perevalov

Abstract

Using BoC-GEM-Fin, a large-scale DSGE model with real, nominal and financial frictions featuring a banking sector, we explore the macroeconomic implications of various types of countercyclical bank capital regulations. Results suggest that countercyclical capital requirements have a significant stabilizing effect on key macroeconomic variables, but mostly after financial shocks. Moreover, the bank capital regulatory policy and monetary policy interact, and this interaction is contingent on the type of shocks that drive the economic cycle. Finally, we analyze loss functions based on macroeconomic and financial variables to arrive at an optimal countercyclical regulatory policy in a class of simple implementable Taylor-type rules. Compared to bank capital regulatory policy, monetary policy is able to stabilize the economy more efficiently after real shocks. On the other hand, financial shocks require the regulator to be more aggressive in loosening/tightening capital requirements for banks, even as monetary policy works to counter the deviations of inflation from the target.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 13-8.

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Length: 29 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:bca:bocawp:13-8

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Keywords: Economic models; Financial Institutions; Financial stability; International topics;

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Cited by:
  1. Neyer, Ulrike & Vieten, Thomas, 2013. "Die neue europäische Bankenaufsicht: Eine kritische Würdigung," DICE Ordnungspolitische Perspektiven 45, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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