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Capital regulation and monetary policy with fragile banks

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  • Angeloni, Ignazio
  • Faia, Ester

Abstract

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.

Suggested Citation

  • Angeloni, Ignazio & Faia, Ester, 2013. "Capital regulation and monetary policy with fragile banks," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 311-324.
  • Handle: RePEc:eee:moneco:v:60:y:2013:i:3:p:311-324
    DOI: 10.1016/j.jmoneco.2013.01.003
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    References listed on IDEAS

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