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Monetary policy and capital regulation in the US and Europe

Author

Listed:
  • Ethan Cohen-Cole
  • Jonathan Morse

Abstract

The Federal Reserve and the European Central Bank aggressively lowered interest rates during the recent crisis. Both actions were at odds with an anti-inflationary policy stance: in August 2007, inflation expectations were high, particularly in the United States. To explain these actions, we model an economy with a leveraged and regulated financial sector. We find optional Taylor rules using simulated GMM, and find rules consistent with a pro-inflationary reaction during financial crises and a standard output-inflation mandate for the central bank. Our results support procyclical regulation not because of adequacy concerns, but instead due to the impact on monetary policy.

Suggested Citation

  • Ethan Cohen-Cole & Jonathan Morse, 2013. "Monetary policy and capital regulation in the US and Europe," International Economics, CEPII research center, issue 134, pages 56-77.
    • Handle: RePEc:cii:cepiie:2013-q2-134-4
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    File URL: http://www.sciencedirect.com/science/article/pii/S2110701713000115
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    Citations

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    Cited by:

    1. Masciandaro, Donato & Romelli, Davide, 2015. "Ups and downs of central bank independence from the Great Inflation to the Great Recession: theory, institutions and empirics," Financial History Review, Cambridge University Press, vol. 22(3), pages 259-289, December.
    2. Yang Hu & Yanran Hong & Kai Feng & Jikai Wang, 2023. "Evaluating the Importance of Monetary Policy Uncertainty: The Long- and Short-Term Effects and Responses," Evaluation Review, , vol. 47(2), pages 264-286, April.
    3. Donato Masciandaro & Davide Romelli, 2019. "Behavioral Monetary Policymaking: Economics, Political Economy and Psychology," World Scientific Book Chapters, in: Behavioral Finance The Coming of Age, chapter 9, pages 285-329, World Scientific Publishing Co. Pte. Ltd..
    4. Ebele S. Nwokoye & Jonathan O. Oniore, 2017. "Impact of Monetary Policy on Capital Inflows in Nigeria," Business, Management and Economics Research, Academic Research Publishing Group, vol. 3(10), pages 192-200, 10-2017.

    More about this item

    Keywords

    Monetary policy; Bank regulation; European Central Bank;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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