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Modeling Two Macro Policy Instruments - Interest Rates and Aggregate Capital Requirements

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  • Hans Gersbach
  • Volker Hahn

Abstract

We present a simple neoclassical model to explore how an aggregate bank-capital requirement can be used as a macroeconomic policy tool and how this additional tool interacts with monetary policy. Aggregate bank-capital requirements should be adjusted when the economy is hit by cost-push shocks but should not respond to demand shocks. Moreover, an optimal institutional structure is characterized as follows: First, monetary policy is delegated to an independent and conservative central banker. Second, setting aggregate bank-capital requirements is separated from monetary policy.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3598.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3598

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Related research

Keywords: central banks; banking regulation; capital requirements; optimal monetary policy;

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References

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  1. Samuel G. Hanson & Anil K. Kashyap & Jeremy C. Stein, 2011. "A Macroprudential Approach to Financial Regulation," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 3-28, Winter.
  2. Douglas W. Diamond & Raghuram G. Rajan, . "A Theory of Bank Capital," CRSP working papers 363, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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  4. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
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  8. Van den Heuvel, Skander J., 2008. "The welfare cost of bank capital requirements," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 298-320, March.
  9. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  10. Joe Peek & Eric S. Rosengren & Geoffrey M. B. Tootell, 1999. "Is bank supervision central to central banking?," Working Papers 99-7, Federal Reserve Bank of Boston.
  11. Neiss, Katharine S, 1999. "Discretionary Inflation in a General Equilibrium Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 357-74, August.
  12. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  13. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, January.
  14. Frederic S. Mishkin, 2001. "The Transmission Mechanism and the Role of Asset Prices in Monetary Policy," NBER Working Papers 8617, National Bureau of Economic Research, Inc.
  15. Gersbach, Hans, 2003. "The Optimal Capital Structure of an Economy," CEPR Discussion Papers 4016, C.E.P.R. Discussion Papers.
  16. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
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Cited by:
  1. Friedrich L. Sell, 2012. "Some of the Pros and Cons of Central Banking Supervision by the ECB," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 13(4), pages 40-45, December.
  2. Hans Gersbach, 2013. "Preventing Banking Crises--with Private Insurance?," CESifo Economic Studies, CESifo, vol. 59(4), pages 609-627, December.

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