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Optimal Bank Regulation and Monetary Policy

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Author Info
John J. Seater

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Abstract

A unified model of monetary policy and bank regulation is presented. In accordance with modern banking theory, banks not only intermediate loans and deposits but also provide a financial service affecting aggregate output. Optimal parameter settings for monetary and regulatory policy are derived. New results are that monetary policy affects the expected level as well as the variance of output, bank regulation should change continually in response to the state of the economy, and bank regulation and monetary policy should be tightly coordinated. This last result has important implications for the institutional arrangements for conducting regulatory and monetary policy.

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Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 00-38.

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Date of creation: Oct 2000
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Handle: RePEc:wop:pennin:00-38

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  1. Carmine Di Noia & Giorgio Di Giorgio, 1999. "Should Banking Supervision and Monetary Policy Tasks be Given to Different Agencies?," Economics Working Papers 411, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  2. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December. [Downloadable!] (restricted)
  3. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March. [Downloadable!] (restricted)
  4. Bernanke, Ben & Gertler, Mark, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 87-114, February. [Downloadable!] (restricted)
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  5. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June. [Downloadable!] (restricted)
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  6. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
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  7. Santomero, Anthony M. & Seater, John J., 2000. "Is there an optimal size for the financial sector?," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 945-965, June. [Downloadable!] (restricted)
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  8. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  9. Franklin Allen & Anthony M. Santomero, 1996. "The Theory of Financial Intermediation," Center for Financial Institutions Working Papers 96-32, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  10. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January. [Downloadable!] (restricted)
  11. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June. [Downloadable!] (restricted)
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  12. Bernanke, Ben S, 1981. "Bankruptcy, Liquidity, and Recession," American Economic Review, American Economic Association, vol. 71(2), pages 155-59, May.
  13. Woglom, Geoffrey, 1979. "Rational Expectations and Monetary Policy in a Simple Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 93(1), pages 91-105, February. [Downloadable!] (restricted)
  14. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
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  15. Allen, Franklin & Santomero, Anthony M., 1997. "The theory of financial intermediation," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1461-1485, December. [Downloadable!] (restricted)
  16. Frederick T. Furlong, 1992. "Capital regulation and bank lending," Economic Review, Federal Reserve Bank of San Francisco, pages 23-33. [Downloadable!]
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