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Capital requirements, bank behavior and monetary policy: A theoretical analysis with an empirical application to India

Author

Listed:
  • Saibal Ghosh

    (Department of Economic Analysis and Policy, Reserve Bank of India, S.B.S. Marg, Fort, Mumbai - 400001, India.)

Abstract

The paper addresses the issue of monetary policy transmission through the banking sector in the presence of a bank capital regulation. A model of bank behavior is presented, which shows how a monetary policy shock affects both deposit and lending, in the short run (when equity capital is assumed to be fixed) as well as in the long run (when equity is endogenous). The analysis is extended to incorporate a salient feature of Basel II incorporating loans with differential risk weights. The basic spirit of the model is empirically examined using data on Indian banks for 1993-2004. The findings indicate that constrained banks raises lending to less risky borrowers in response to a monetary contraction.

Suggested Citation

  • Saibal Ghosh, 2008. "Capital requirements, bank behavior and monetary policy: A theoretical analysis with an empirical application to India," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 43(2), pages 205-227, December.
    • Handle: RePEc:dse:indecr:v:43:y:2008:i:2:p:205-227
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    Cited by:

    1. Ыбраев Ж. // Ybrayev Zh., 2024. "Макроэкономическая активность и контр-циклический буфер капитала в Казахстане // Macroeconomic Activity and Countercyclical Capital Buffer in Kazakhstan," Economic Review(National Bank of Kazakhstan), National Bank of Kazakhstan, issue 2 Special, pages 92-100.
    2. Адилханова З. // Adilkhanova Z., 2024. "Влияние жесткости заработных плат на инфляцию в рамках трансмиссионного механизма монетарной политики // Impact of Wage Rigidity on Inflation within the Framework of Monetary Policy Transmission Mechanism," Economic Review(National Bank of Kazakhstan), National Bank of Kazakhstan, issue 2 Special, pages 45-59.
    3. Ажгалиева Д. // Azhgaliyeva D. & Капсалямова З. // Kapsalyamova Z., 2024. "Государственная поддержка в продвижении зеленых облигаций в Азии: эмпирические данные // Policy support in promoting green bonds in Asia: empirical evidence," Economic Review(National Bank of Kazakhstan), National Bank of Kazakhstan, issue 2 Special, pages 63-64.
    4. Еселева-Пионка М. // Yesseleva-Pionka М. & Кенжегаранова М. // Kenzhegaranova М. & Азимбекова А. // Azimbekova А. & Кусниева А. // Kusniyeva А. & Байбекова А. // Baibekova А., 2024. "Противодействие финансовым мошенничествам, в частности пирамидам, интернет и телефонным мошенничествам // Combating Fnancial Fraud, in Particular Pyramid, Internet and Telephone Fraud," Economic Review(National Bank of Kazakhstan), National Bank of Kazakhstan, issue 2 Special, pages 86-89.
    5. Абилов Н. // Abilov N., 2024. "Риск действительно имеет значение: шоки неопределенности в условиях малой экономики страны – экспортера нефти // Risk indeed matters: uncertainty shocks in a small oil-exporting economy," Economic Review(National Bank of Kazakhstan), National Bank of Kazakhstan, issue 2 Special, pages 7-23.
    6. Яндиев М. // Yandiyev М., 2024. "Феномен недооценки при первичном размещении акций объясняется алчностью финансовых спекулянтов // The Phenomenon of Underpricing during Initial Public Offering is Explained by the Greed of Financial Speculators," Economic Review(National Bank of Kazakhstan), National Bank of Kazakhstan, issue 2 Special, pages 65-85.
    7. Рысбаева Ә. Б. // Rysbayeva A.B. & Ханет А. Б. // Khanet А. B., 2024. "Фискальные мультипликаторы в Казахстане // Fiscal Multipliers in Kazakhstan," Economic Review(National Bank of Kazakhstan), National Bank of Kazakhstan, issue 2 Special, pages 24-44.
    8. Mikhail Andreev & M. Udara Peiris & Aleksandr Shirobokov & Dimitrios P. Tsomocos, 2019. "Macroprudential Policy and Financial (In)Stability Analysis in the Russian Federation," Russian Journal of Money and Finance, Bank of Russia, vol. 78(3), pages 3-37, September.
    9. O. Borzykh., 2017. "The impact of banks’ capital adequacy ratio on bank lending channel of monetary transmission in Russia," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 7.
    10. Алдашев А. // Aldashev А. & Баткеев Б. // Batkeyev В., 2024. "Задолженность домохозяйств, гетерогенность и финансовая стабильность на примере Казахстана // Household debt, heterogeneity and financial stability: Evidence from Kazakhstan," Economic Review(National Bank of Kazakhstan), National Bank of Kazakhstan, issue 2 Special, pages 90-91.
    11. Татибеков Б. // Tatibekov B. & Абдразакова А. // Abdrazakova А., 2024. "Особенности взаимосвязи рынка труда и инфляционных процессов в экономике Казахстана в период 2001-2021 гг.: теория и практика реализации // Specifics of Relationship between the Labor Market and Inflationary Processes in the Kazakh Economy in 2001-20," Economic Review(National Bank of Kazakhstan), National Bank of Kazakhstan, issue 2 Special, pages 60-61.

    More about this item

    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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