Empowering Central Bank Asset Purchases: The Role of Financial Policies

Abstract

This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.

Can central banks do the unpleasant job that governments should do?

“…To hit the above, we also need to set the parameter associated with loans provided by the CB, z , at 0:2, while, for simplicity, we set the parameter associated with reserves, m , at 0. 27 Regarding the banks'survival rate, , and the proportional transfer of entering banks, , they are calibrated to match banks'reserves at the CB as a percentage of GDP at the end of 2022 (m p =y = 30%) and to get a reasonable value of banks' total net worth as share of GDP (around 45%); the resulting values are = 0:92 and = 0:017.…”

Monetary policy, prudential policy and bank's risk‐taking: A literature review

“…The combination of prudential with unconventional monetary policy may depend on some factors such as the bank capitalization or the limited liability. In this sense, Darracq Pariès et al (2019) show that, in a weakly-capitalized banking system, countercyclical macroprudential policies are effective in alleviating excessive risk-taking by banks. However, the intervention of such macroprudential measures are costly in terms of macroeconomic stabilization.…”

“…In this sense, Darracq Pariès et al. (2019) show that, in a weakly‐capitalized banking system, countercyclical macroprudential policies are effective in alleviating excessive risk‐taking by banks. However, the intervention of such macroprudential measures are costly in terms of macroeconomic stabilization.…”