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Capital Regulation, Monetary Policy and Financial Stability

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  • Pierre-Richard Agenor
  • 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 stability is defined in terms of a weighted average of inflation and output gap volatility, whereas financial stability is defined in terms of three alternative indicators (real house prices, the credit-to-GDP ratio, and the loan spread), both individually and in combination. Numerical experiments associated with a housing demand shock show that in a number of cases, 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 policy interest rate smoothing, and the stronger the policymaker’s concern with financial stability, the larger is the sensitivity of the regulatory rule to credit growth gaps.

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Bibliographic Info

Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1228.

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Date of creation: 2012
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Handle: RePEc:tcb:wpaper:1228

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Keywords: Financial Stability; Credit; Monetary Policy;

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Cited by:
  1. William Tayler & Roy Zilberman, 2014. "Macroprudential Regulation and the Role of Monetary Policy," Working Papers, Lancaster University Management School, Economics Department 63933064, Lancaster University Management School, Economics Department.
  2. 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, School of Public and Business Administration, Getulio Vargas Foundation (Brazil) 1, School of Public and Business Administration, Getulio Vargas Foundation (Brazil).
  3. Babeckii, Ian & Komárek, Luboš & Komárková, Zlatuše, 2012. "Integration of Chinese and Russian stock markets with world markets: National and sectoral perspectives," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 4/2012, Bank of Finland, Institute for Economies in Transition.
  4. Florina-Cristina Badarau & Alexandra Popescu, 2012. "Monetary Policy and Credit Cycles: A DSGE Analysis," Working Papers, HAL halshs-00828074, HAL.
  5. Pierre-Richard & K. Alper & L. Pereira da Silva, 2011. "Capital Requirements and Business Cycles with Credit Market Imperfections," Working Papers Series, Central Bank of Brazil, Research Department 231, Central Bank of Brazil, Research Department.
  6. Marta Areosa & Waldyr Areosa, 2012. "Asset Prices and Monetary Policy – A sticky-dispersed information model," Working Papers Series, Central Bank of Brazil, Research Department 285, Central Bank of Brazil, Research Department.
  7. Bechlioulis, Alexandros & Brissimis, Sophocles, 2014. "Consumer default and optimal consumption decisions," MPRA Paper 56864, University Library of Munich, Germany.
  8. Canuto, Otaviano & Cavallari, Matheus, 2013. "Monetary policy and macroprudential regulation : whither emerging markets," Policy Research Working Paper Series, The World Bank 6310, The World Bank.
  9. 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, Elsevier, vol. 394(C), pages 211-216.
  10. Juan Pablo Medina Guzman & Jorge Roldos, 2014. "Monetary and Macroprudential Policies to Manage Capital Flows," IMF Working Papers, International Monetary Fund 14/30, International Monetary Fund.

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