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Capital Regulation, Monetary Policy and Financial Stability

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  • Pierre-Richard Agénor
  • Koray Alper
  • Luiz Pereira da Silva

Abstract

This paper examines the roles of bank capital regulation and monetary policy in mitigating procyclicality and promoting macroeconomic and financial stability. The analysis is based on a dynamic stochastic model with imperfect credit markets. Macroeconomic (financial) stability is defined in terms of the volatility of nominal income (real house prices). Numerical experiments show that even if monetary policy can react strongly to inflation deviations from target, combining a credit-augmented interest rate rule and a Basel III-type countercyclical capital regulatory rule may be optimal for promoting overall economic stability. The greater the degree of interest rate smoothing, and the stronger the policymaker's concern with macroeconomic stability, the larger is the sensitivity of the regulatory rule to credit growth gaps.

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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 154.

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Length: 40 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:man:cgbcrp:154

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Citations

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Cited by:
  1. Agénor, P.-R. & Alper, K. & Pereira da Silva, L., 2009. "Capital requirements and business cycles with credit market imperfections," Policy Research Working Paper Series 5151, The World Bank.
  2. Tayler, William & Zilberman, Roy, 2014. "Macroprudential Regulation and the Role of Monetary Policy," EconStor Preprints 95230, ZBW - German National Library of Economics.
  3. Ornelas, Jose Renato Haas & Barbachan, José Fajardo & Farias, Aquiles Rocha de, 2012. "Estimating Relative Risk Aversion, Risk-Neutral and Real-World Densities using Brazilian Real Currency Options," EBAPE Working Papers 1, School of Public and Business Administration, Getulio Vargas Foundation (Brazil).
  4. Marta Areosa & Waldyr Areosa, 2012. "Asset Prices and Monetary Policy – A sticky-dispersed information model," Working Papers Series 285, Central Bank of Brazil, Research Department.
  5. Tabak, Benjamin M. & Takami, Marcelo & Rocha, Jadson M.C. & Cajueiro, Daniel O. & Souza, Sergio R.S., 2014. "Directed clustering coefficient as a measure of systemic risk in complex banking networks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 394(C), pages 211-216.
  6. Bechlioulis, Alexandros & Brissimis, Sophocles, 2014. "Consumer default and optimal consumption decisions," MPRA Paper 56864, University Library of Munich, Germany.
  7. Canuto, Otaviano & Cavallari, Matheus, 2013. "Monetary policy and macroprudential regulation : whither emerging markets," Policy Research Working Paper Series 6310, The World Bank.
  8. Babeckii, Ian & Komárek, Luboš & Komárková, Zlatuše, 2012. "Integration of Chinese and Russian stock markets with world markets: National and sectoral perspectives," BOFIT Discussion Papers 4/2012, Bank of Finland, Institute for Economies in Transition.
  9. Florina-Cristina Badarau & Alexandra Popescu, 2012. "Monetary Policy and Credit Cycles: A DSGE Analysis," Working Papers halshs-00828074, HAL.
  10. Juan Pablo Medina Guzman & Jorge Roldos, 2014. "Monetary and Macroprudential Policies to Manage Capital Flows," IMF Working Papers 14/30, International Monetary Fund.

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