Countercyclical Bank Capital Requirement and Optimized Monetary Policy Rules
AbstractUsing 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 InfoPaper provided by Bank of Canada in its series Working Papers with number 13-8.
Length: 29 pages
Date of creation: 2013
Date of revision:
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Economic models; Financial Institutions; Financial stability; International topics;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- G1 - Financial Economics - - General Financial Markets
- G2 - Financial Economics - - Financial Institutions and Services
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-20 (All new papers)
- NEP-BAN-2013-04-20 (Banking)
- NEP-CBA-2013-04-20 (Central Banking)
- NEP-DGE-2013-04-20 (Dynamic General Equilibrium)
- NEP-MAC-2013-04-20 (Macroeconomics)
- NEP-MON-2013-04-20 (Monetary Economics)
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- 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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