IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Macroprudential Regulation and the Role of Monetary Policy

  • Tayler, William
  • Zilberman, Roy

This paper examines the macroprudential roles of bank capital regulation and monetary policy in a Dynamic Stochastic General Equilibrium model with endogenous financial frictions and a borrowing cost channel. We identify various transmission channels through which credit risk, commercial bank losses, monetary policy and bank capital requirements affect the real economy. These mechanisms generate significant financial accelerator effects, thus providing a rationale for a macroprudential toolkit. Following credit shocks, countercyclical bank capital regulation is more effective than monetary policy in promoting financial, price and overall macroeconomic stability. For supply shocks, macroprudential regulation combined with a strong response to inflation in the central bank policy rule yield the lowest welfare losses. The findings emphasize the importance of the Basel III regulatory accords and cast doubt on the desirability of conventional Taylor rules during periods of financial distress.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
File Function: original version
Download Restriction: no

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 54885.

in new window

Date of creation: 30 Mar 2014
Date of revision:
Handle: RePEc:pra:mprapa:54885
Contact details of provider: Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, June.
  2. Charles Nolan & Christoph Thoenissen, 2008. "Financial shocks and the US business cycle," CDMA Working Paper Series 200810, Centre for Dynamic Macroeconomic Analysis.
  3. Pierre-Richard Agenor & Joshua Aizenman, 1997. "Contagion and Volatility with Imperfect Credit Markets," NBER Working Papers 6080, National Bureau of Economic Research, Inc.
  4. Jermann, Urban & Quadrini, Vincenzo, 2009. "Macroeconomic Effects of Financial Shocks," CEPR Discussion Papers 7451, C.E.P.R. Discussion Papers.
  5. Johann Scharler & Sylvia Kaufmann, 2007. "Financial Systems and the Cost Channel Transmission of Monetary Policy Shocks," Money Macro and Finance (MMF) Research Group Conference 2006 67, Money Macro and Finance Research Group.
  6. Pierre-Richard Agénor & K. Alper & Luiz A. Pereira da Silva, 2011. "Capital Regulation, Monetary Policy and Financial Stability," Working Papers Series 237, Central Bank of Brazil, Research Department.
  7. Barth, James R. & Caprio Jr., Gerard & Levine, Ross, 2001. "Bank regulation and supervision : what works best?," Policy Research Working Paper Series 2725, The World Bank.
  8. Alasdair Scott & Pau Rabanal & Prakash Kannan, 2009. "Monetary and Macroprudential Policy Rules in a Model with House Price Booms," IMF Working Papers 09/251, International Monetary Fund.
  9. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  10. Stephanie Schmitt-Grohe & Martin Uribe, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," NBER Working Papers 10253, National Bureau of Economic Research, Inc.
  11. Kevin Moran & Cesaire A. Meh & Ian Christensen, 2010. "Bank Leverage Regulation and Macroeconomic Dynamics," 2010 Meeting Papers 757, Society for Economic Dynamics.
  12. Francisco Covas & Shigeru Fujita, 2010. "Procyclicality of Capital Requirements in a General Equilibrium Model of Liquidity Dependence," International Journal of Central Banking, International Journal of Central Banking, vol. 6(34), pages 137-173, December.
  13. Alvaro Aguiar & Ines Drumond, 2007. "Business Cycle and Bank Capital: Monetary Policy Transmission under the Basel Accords," FEP Working Papers 242, Universidade do Porto, Faculdade de Economia do Porto.
  14. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  15. Césaire Meh & Kevin Moran, 2008. "The Role of Bank Capital in the Propagation of Shocks," Working Papers 08-36, Bank of Canada.
  16. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
  17. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  18. Fernandez-Corugedo, Emilio & McMahon, Michael & Millard, Stephen & Rachel, Lukasz, 2011. "Understanding the macroeconomic effects of working capital in the United Kingdom," Bank of England working papers 422, Bank of England.
  19. Ibrahim Chowdhury & Mathias Hoffmann & Andreas Schabert, 2004. "Inflation Dynamics And The Cost Channel Of Monetary Transmission," Royal Economic Society Annual Conference 2004 80, Royal Economic Society.
  20. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2013. "Risk Shocks," NBER Working Papers 18682, National Bureau of Economic Research, Inc.
  21. Bojan Markovic, 2006. "Bank capital channels in the monetary transmission mechanism," Bank of England working papers 313, Bank of England.
  22. Samuel G. Hanson & Anil K. Kashyap & Jeremy C. Stein, 2011. "A Macroprudential Approach to Financial Regulation," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 3-28, Winter.
  23. Rabanal, Pau, 2007. "Does inflation increase after a monetary policy tightening? Answers based on an estimated DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 906-937, March.
  24. Suh, Hyunduk, 2014. "Dichotomy between macroprudential policy and monetary policy on credit and inflation," Economics Letters, Elsevier, vol. 122(2), pages 144-149.
  25. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
  26. De Fiore, Fiorella & Tristani, Oreste, 2009. "Optimal monetary policy in a model of the credit channel," Working Paper Series 1043, European Central Bank.
  27. Angeloni, Ignazio & Faia, Ester, 2013. "Capital regulation and monetary policy with fragile banks," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 311-324.
  28. Glocker, C. & Towbin, P., 2012. "Reserve Requirements for Price and Financial Stability - When Are They Effective?," Working papers 363, Banque de France.
  29. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  30. DiCecio, Riccardo, 2009. "Sticky wages and sectoral labor comovement," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 538-553, March.
  31. Urban Jermann & Vincenzo Quadrini, 2012. "Erratum: Macroeconomic Effects of Financial Shocks," American Economic Review, American Economic Association, vol. 102(2), pages 1186-1186, April.
  32. George J. Bratsiotis & William J. Tayler & Roy Zilberman, 2014. "Financial Regulation, Credit and Liquidity Policy and the Business Cycle," Centre for Growth and Business Cycle Research Discussion Paper Series 196, Economics, The Univeristy of Manchester.
  33. Jae Sim & Raphael Schoenle & Egon Zakrajsek & Simon Gilchrist, 2013. "Inflation Dynamics During the Financial Crisis," 2013 Meeting Papers 826, Society for Economic Dynamics.
  34. Airaudo, Marco & Olivero, María Pía, 2014. "Optimal Monetary Policy with Counter-Cyclical Credit Spreads," School of Economics Working Paper Series 2014-1, LeBow College of Business, Drexel University.
  35. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  36. Vasco Cúrdia & Michael Woodford, 2009. "Credit spreads and monetary policy," Staff Reports 385, Federal Reserve Bank of New York.
  37. Paolo Angelini & Stefano Neri & Fabio Panetta, 2014. "The Interaction between Capital Requirements and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(6), pages 1073-1112, 09.
  38. Jaromir Benes & Michael Kumhof, 2011. "Risky Bank Lending and Optimal Capital Adequacy Regulation," IMF Working Papers 11/130, International Monetary Fund.
  39. Ravenna, Federico & Walsh, Carl E., 2006. "Optimal monetary policy with the cost channel," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 199-216, March.
  40. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and banking in a DSGE model of the euro area," Temi di discussione (Economic working papers) 740, Bank of Italy, Economic Research and International Relations Area.
  41. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  42. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  43. Agénor, Pierre-Richard & Bratsiotis, George J. & Pfajfar, Damjan, 2014. "Credit Frictions, Collateral, And The Cyclical Behavior Of The Finance Premium," Macroeconomic Dynamics, Cambridge University Press, vol. 18(05), pages 985-997, July.
  44. Anthony Coleman & Neil Esho & Ian Sharpe, 2006. "Does Bank Monitoring Influence Loan Contract Terms?," Journal of Financial Services Research, Springer, vol. 30(2), pages 177-198, October.
  45. Tommaso Monacelli & Ester Faia, 2005. "Optimal Interest Rate Rules, Asset Prices and Credit Frictions," Computing in Economics and Finance 2005 452, Society for Computational Economics.
  46. Pfajfar, Damjan & Santoro, Emiliano, 2014. "Credit Market Distortions, Asset Prices And Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 18(03), pages 631-650, April.
  47. Liu, Guangling (Dave) & Seeiso, Nkhahle E., 2012. "Basel II procyclicality: The case of South Africa," Economic Modelling, Elsevier, vol. 29(3), pages 848-857.
  48. Gertler, Mark & Kiyotaki, Nobuhiro, 2010. "Financial Intermediation and Credit Policy in Business Cycle Analysis," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 11, pages 547-599 Elsevier.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:54885. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.