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A prudential stable funding requirement and monetary policy in a small open economy

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  • Jacob, Punnoose
  • Munro, Anella

Abstract

The Basel III net stable funding requirement, introduced in January 2018, requires banks to use a minimum share of long-term wholesale funding and deposits to fund their assets. A similar regulation has been in place in New Zealand since 2010. We introduce the stable funding requirement (SFR) into an open-economy DSGE model featuring a banking sector with richly-specified liabilities, and estimate the model for New Zealand. We then evaluate the impact of the new prudential instrument on monetary policy trade-offs. A higher steady-state SFR level amplifies the effects of shocks to the spread on long-term bond financing in the banking sector, adding to macroeconomic volatility conditional on these shocks. However, the SFR plays a passive role in the transmission of all other shocks to the real economy. Hence in the overall picture, the monetary policy trade-off between inflation stabilisation and output stabilisation, is only slightly worsened by the SFR. We note that the trade-off can be improved when monetary policy responds systematically to credit growth.

Suggested Citation

  • Jacob, Punnoose & Munro, Anella, 2018. "A prudential stable funding requirement and monetary policy in a small open economy," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 89-106.
  • Handle: RePEc:eee:jbfina:v:94:y:2018:i:c:p:89-106
    DOI: 10.1016/j.jbankfin.2018.06.004
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    Cited by:

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    3. Jacob Punnoose & Amber Wadsworth, 2018. "Estimated policy rules for different monetary regimes: Flexible inflation targeting versus a dual mandate," Reserve Bank of New Zealand Analytical Notes series AN2018/11, Reserve Bank of New Zealand.
    4. Punnoose Jacob & Martin Wong, 2018. "Estimating the NAIRU and the Natural Rate of Unemployment for New Zealand," Reserve Bank of New Zealand Analytical Notes series AN2018/04, Reserve Bank of New Zealand.

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