Will Macroprudential Policy Counteract Monetary Policy’s Effects on Financial Stability?
Electronic Access:
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Summary:
How does monetary policy impact upon macroprudential regulation? This paper models monetary policy's transmission to bank risk taking, and its interaction with a regulator's optimization problem. The regulator uses its macroprudential tool, a leverage ratio, to maintain financial stability, while taking account of the impact on credit provision. A change in the monetary policy rate tilts the regulator's entire trade-off. We show that the regulator allows interest rate changes to partly "pass through" to bank soundness by not neutralizing the risk-taking channel of monetary policy. Thus, monetary policy affects financial stability, even in the presence of macroprudential regulation.
Series:
Working Paper No. 2015/283
Subject:
Bank soundness Banking Central bank policy rate Financial crises Financial sector policy and analysis Financial sector stability Financial services Macroprudential policy
English
Publication Date:
December 29, 2015
ISBN/ISSN:
9781513545332/1018-5941
Stock No:
WPIEA2015283
Pages:
23
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