Rights statement: This is the author’s version of a work that was accepted for publication in Journal of Financial Stability. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Financial Stability, 26 C, 2016 DOI: 10.1016/j.jfs.2016.08.001
Accepted author manuscript, 680 KB, PDF document
Available under license: CC BY-NC-ND
Final published version
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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
}
TY - JOUR
T1 - Macroprudential regulation, credit spreads and the role of monetary policy
AU - Tayler, William John
AU - Zilberman, Roy
N1 - This is the author’s version of a work that was accepted for publication in Journal of Financial Stability. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Financial Stability, 26 C, 2016 DOI: 10.1016/j.jfs.2016.08.001
PY - 2016/10
Y1 - 2016/10
N2 - We study the macroprudential roles of bank capital regulation and monetary policy in a borrowing cost channel model with endogenous financial frictions, driven by credit risk, bank losses and bank capital costs. These frictions induce financial accelerator mechanisms and motivate the examination of a macroprudential toolkit. Following credit shocks, countercyclical regulation is more effective than monetary policy in promoting price, financial and macroeconomic stability. For supply shocks, combining macroprudential regulation with a stronger anti-inflationary policy stance is optimal. The findings emphasize the importance of the Basel III accords in alleviating the output-inflation trade-off faced by central banks, and cast doubt on the desirability of conventional (and unconventional) Taylor rules during periods of financial distress
AB - We study the macroprudential roles of bank capital regulation and monetary policy in a borrowing cost channel model with endogenous financial frictions, driven by credit risk, bank losses and bank capital costs. These frictions induce financial accelerator mechanisms and motivate the examination of a macroprudential toolkit. Following credit shocks, countercyclical regulation is more effective than monetary policy in promoting price, financial and macroeconomic stability. For supply shocks, combining macroprudential regulation with a stronger anti-inflationary policy stance is optimal. The findings emphasize the importance of the Basel III accords in alleviating the output-inflation trade-off faced by central banks, and cast doubt on the desirability of conventional (and unconventional) Taylor rules during periods of financial distress
KW - Basel III – macroprudential policy
KW - Bank capital
KW - Monetary policy
KW - Borrowing cost channel
KW - Welfare
U2 - 10.1016/j.jfs.2016.08.001
DO - 10.1016/j.jfs.2016.08.001
M3 - Journal article
VL - 26
SP - 144
EP - 158
JO - Journal of Financial Stability
JF - Journal of Financial Stability
SN - 1572-3089
IS - C
ER -