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The Interaction between Capital Requirements and Monetary Policy
Author(s) -
ANGELINI PAOLO,
NERI STEFANO,
PANETTA FABIO
Publication year - 2014
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12134
Subject(s) - economics , monetary policy , monetary economics , capital requirement , volatility (finance) , capital (architecture) , capital adequacy ratio , financial capital , capital formation , interest rate , macroeconomics , microeconomics , finance , archaeology , incentive , profit (economics) , history
The interaction between capital requirements and monetary policy is assessed by means of simple rules in a dynamic general equilibrium model featuring a banking sector. In “normal” times, when economic dynamics are driven by supply shocks, an active use of capital requirements generates modest benefits in terms of volatility of the target variables compared to the case in which only the central bank carries out stabilization policies. The lack of cooperation between the two policymakers may result in excessive volatility of the monetary policy rate and capital requirements. The benefits of introducing capital requirements become sizeable when financial shocks, which affect the supply of loans, are important drivers of economic dynamics; the availability of capital requirements as a policy tool yields a significant gain in terms of macroeconomic stabilization, regardless of the type of interaction between monetary and capital requirements policies.