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Capital regulation and monetary policy with fragile banks

  • Angeloni, Ignazio
  • Faia, Ester

Optimizing banks subject to runs are introduced in a macro model to study the transmission of monetary policy and its interplay with bank capital regulation when banks are risky. A monetary expansion and a positive productivity shock increase bank leverage and risk. Risk-based capital requirements amplify the cycle and are welfare detrimental. Within a class of simple policy rules, the best combination includes mildly anticyclical capital ratios (as in Basel III) and a response of monetary policy to asset prices or bank leverage.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 60 (2013)
Issue (Month): 3 ()
Pages: 311-324

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Handle: RePEc:eee:moneco:v:60:y:2013:i:3:p:311-324
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