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Empowering Central Bank Asset Purchases: The Role of Financial Policies

Author

Listed:
  • Matthieu Darracq Paries

    () (European Central Bank)

  • Jenny Korner

    () (d-fine - analytical. quantitative. tech.)

  • Niki Papadopoulou

    () (Central Bank of Cyprus)

Abstract

This paper contributes to the debate on the macroeconomic effectiveness of expansionary non-standard monetary policy measures in a regulated banking environment. Based on an estimated DSGE model, we explore the interactions between central bank asset purchases and bank capital-based financial policies (regulatory, supervisory or macroprudential) through its influence on bank risk-shifting motives. We find that weakly-capitalised banks display excessive risk-taking which reinforces the credit easing channel of central bank asset purchases, at the cost of higher bank default probability and risks to financial stability. In such a case, adequate bank capital demand through higher minimum capital requirements curtails the excessive credit origination and restores a more efficient propagation of central bank asset purchases. As supervisors can formulate further capital demands, uncertainty about the supervisory oversight provokes precautionary motives for banks. They build-up extra capital buffer attenuating non-standard monetary policy. Finally, in a weakly-capitalised banking system, countercyclical macroprudential policy attenuates banks risk-taking and dampens the excessive persistence of the non-standard monetary policy impulse. On the contrary, in a well-capitalised banking system, the macroeconomic stabilisation with central bank asset purchases outweigh the marginal financial stability benefits with macroprudential policy.

Suggested Citation

  • Matthieu Darracq Paries & Jenny Korner & Niki Papadopoulou, 2019. "Empowering Central Bank Asset Purchases: The Role of Financial Policies," Working Papers 2019-1, Central Bank of Cyprus.
  • Handle: RePEc:cyb:wpaper:2019-1
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    More about this item

    Keywords

    non-standard monetary policy; asset purchases; bank capital regulation; risk-taking; regulatory uncertainty; effective lower bound;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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

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