Do Capital Adequacy Requirements Matter for Monetary Policy? / Stephen G. Cecchetti, Lianfi Li.

Format:

Book

Author/Creator:

Cecchetti, Stephen G.

Contributor:

National Bureau of Economic Research.

Li, .

Series:

Working Paper Series (National Bureau of Economic Research) no. w11830.

NBER working paper series no. w11830

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

Central bankers and financial supervisors often have different goals. While monetary policymakers want to ensure that there are always sufficient lending activities to maintain high and stable economic growth, supervisors work to limit banks. lending capacities in order to prevent excessive risk-taking. To avoid working at cross-purposes, central bankers need to adopt a policy strategy that accounts for the impact of capital adequacy requirements. In this paper we derive an optimal monetary policy that reinforces prudential capital requirements at the same time that it stabilizes aggregate economic activity. We go on to show that policymakers at the Federal Reserve adjust interest rate policy in a way that would neutralize the procyclical impact of bank capital requirements. By contrast, central bankers in Germany and Japan clearly do not act as the theory suggests they should.

Notes:

Print version record

December 2005.