Do capital adequacy requirements matter for monetary policy?
By: Stephen G. Cecchetti, Lianfi Li.
Contributors: Li, Lianfi.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 11830; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 11830.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Monetary policy -- United States.; Monetary policy -- Germany.; Monetary policy -- Japan.; Capital -- United States.; Capital -- Germany.; Capital -- Japan.
Description: "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"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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