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Modeling Two Macro Policy Instruments - Interest Rates and Aggregate Capital Requirements

Author

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  • Hans Gersbach
  • Volker Hahn

Abstract

We present a simple neoclassical model to explore how an aggregate bank-capital requirement can be used as a macroeconomic policy tool and how this additional tool interacts with monetary policy. Aggregate bank-capital requirements should be adjusted when the economy is hit by cost-push shocks but should not respond to demand shocks. Moreover, an optimal institutional structure is characterized as follows: First, monetary policy is delegated to an independent and conservative central banker. Second, setting aggregate bank-capital requirements is separated from monetary policy.

Suggested Citation

  • Hans Gersbach & Volker Hahn, 2011. "Modeling Two Macro Policy Instruments - Interest Rates and Aggregate Capital Requirements," CESifo Working Paper Series 3598, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3598
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    References listed on IDEAS

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    6. Van den Heuvel, Skander J., 2008. "The welfare cost of bank capital requirements," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 298-320, March.
    7. Douglas W. Diamond & Raghuram G. Rajan, 2000. "A Theory of Bank Capital," Journal of Finance, American Finance Association, vol. 55(6), pages 2431-2465, December.
    8. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, January.
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    11. Frederic S. Mishkin, 2001. "The Transmission Mechanism and the Role of Asset Prices in Monetary Policy," NBER Working Papers 8617, National Bureau of Economic Research, Inc.
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    13. Hoggarth, Glenn & Reis, Ricardo & Saporta, Victoria, 2002. "Costs of banking system instability: Some empirical evidence," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 825-855, May.
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    Citations

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    Cited by:

    1. Gersbach, Hans & Hahn, Volker & Liu, Yulin, 2017. "Macroprudential Policy in the New Keynesian World," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168185, Verein für Socialpolitik / German Economic Association.
    2. Friedrich L. Sell, 2012. "Some of the Pros and Cons of Central Banking Supervision by the ECB," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(4), pages 40-45, December.
    3. Hans Gersbach, 2013. "Preventing Banking Crises--with Private Insurance?," CESifo Economic Studies, CESifo, vol. 59(4), pages 609-627, December.

    More about this item

    Keywords

    central banks; banking regulation; capital requirements; optimal monetary policy;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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