On the (non-)equivalence of capital adequacy and monetary policy: A response to Cechetti and Kohler
AbstractThe instrument problem in monetary policy is back on the agenda. Until recently interest rate policy was widely thought to be sufficient for the attainment of appropriate monetary policy goals. No longer. In the wake of the international financial crisis there is much pressure on monetary authorities to incorporate the goal of financial stability more explicitly in policy. This requires an expansion of the instruments typically used by central banks. Cechetti and Kohler (2010) recently considered this new version of the instrument problem in monetary policy by analysing the distinct role and potential for co-ordinating (i) interest rates and (ii) capital adequacy requirements. In this paper we connect this modern debate with an earlier version of the instrument problem, famously discussed by Poole (1970). Then, as now (we claim), the main message of the analysis is the non-equivalence of these instruments and the structural features of the economy on the basis of which one would prefer a particular combination of these instruments. These results are demonstrated with a set of simulations. We also offer a theoretical criticism of the modelling approach used by Cechetti and Kohler (2010).
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Bibliographic InfoPaper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 04/2011.
Date of creation: 2011
Date of revision:
Monetary policy; Instrument problem; Interest rates; Alternative monetary policy instruments; Balance sheet operations; Policy co-ordination;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-26 (All new papers)
- NEP-BAN-2011-03-26 (Banking)
- NEP-CBA-2011-03-26 (Central Banking)
- NEP-CMP-2011-03-26 (Computational Economics)
- NEP-MAC-2011-03-26 (Macroeconomics)
- NEP-MON-2011-03-26 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gunnar Bardsen & Kjersti-Gro Lindquist & Dimitrios P.Tsomocos, 2006.
"Evaluation of macroeconomic models for financial stability analysis,"
OFRC Working Papers Series
2006fe01, Oxford Financial Research Centre.
- Gunnar Bårdsen & Kjersti-Gro Lindquist & Dimitrios P. Tsomocos, 2006. "Evaluation of macroeconomic models for financial stability analysis," Working Paper 2006/01, Norges Bank.
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- Dimitrios P Tsomocos & Gunnar Bardsen, 2006. "Evaluation of macroeconomic models for financial stability analysis," Economics Series Working Papers 2006-FE-01, University of Oxford, Department of Economics.
- Stan du Plessis & Ben Smit & Federico Sturzenegger, 2007. "Identifying aggregate supply and demand shocks in South Africa," Working Papers 11/2007, Stellenbosch University, Department of Economics.
- Stephen G Cecchetti & Marion Kohler, 2012. "When capital adequacy and interest rate policy are substitutes (and when they are not)," BIS Working Papers 379, Bank for International Settlements.
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