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DO CAPITAL ADEQUACY REQUIREMENTS MATTER FOR MONETARY POLICY?
Author(s) -
CECCHETTI STEPHEN G.,
LI LIANFA
Publication year - 2008
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.2007.00085.x
Subject(s) - economics , interest rate , monetary policy , capital requirement , capital (architecture) , monetary economics , capital adequacy ratio , order (exchange) , reserve requirement , central bank , macroeconomics , finance , microeconomics , incentive , archaeology , history
Central bankers and financial supervisors can have conflicting goals. While monetary policymakers work to ensure sufficient lending activities as a foundation for high and stable economic growth, supervisors may limit banks’ lending capacities in order to prevent excessive risk taking. We show that, in theory, central bankers can avoid this potential conflict by adopting an interest rate strategy that takes accounts of capital adequacy requirements. Empirical evidence suggests that while policymakers at the Federal Reserve have adjusted their interest rate to neutralizing the procyclical impact of bank capital requirements, those in Germany and Japan have not. ( JEL E52, E58, G21)