The new financial regulation in Basel III and monetary policy: A macroprudential approach

Abstract

The aim of this paper is to study the interaction between the Basel banking regulations and monetary policy. In order to do that, we use a dynamic stochastic general equilibrium (DSGE) model with a housing market, banks, borrowers, and savers. First, we …nd that higher capital requirement ratios (CRR), implied by the Basel regulations, has distributional e¤ects among agents: an increase in the welfare of borrowers at the expense of savers and banks. However, if we let monetary policy to react optimally to the new regulatory framework, it becomes more aggressive, to compensate for a lower money multiplier. As a result, this policy combination brings a more stable economic and …nancial system. Finally, we analyze the optimal way to implement the countercyclical capital bu¤er stated by Basel III. We propose that it follows a macroprudential rule so that the CRR responds to deviations of credit from its steady state. We …nd that, for households, the optimal implementation of this rule together with monetary policy represents a welfare improvement with respect to Basel I and II and brings extra …nancial stability.

Macroprudential policy, central banks and financial stability: Evidence from China

“…6 Ebrahimi Kahou and Lehar (2017) provide a comprehensive review on macroprudential policy. One strand, which we will not be able to discuss in detail, consists of theoretical contributions based on the New Keynesian DSGE models with financial frictions to model the interaction between monetary and macroprudential policy (see, e.g., Angelini et al 2014;Rubio & Carrasco-Gallego 2015;Cesa-Bianchi & Rebucci 2016;Rubio & Carrasco-Gallego 2016;Chen et al 2017). 5 distribution and dynamic provisioning.…”

Are the New Basel III Capital Buffers Countercyclical? Exploring the Option of a Rule-Based Countercyclical Buffer

“…2. This work includes Covas and Fujita, 2010;Darracq Pariès, Kok Sørensen, and Rodriguez-Palenzuela, 2011;Angeloni and Faia, 2013;Repullo, 2013;Angelini, Neri, and Panetta, 2014;Rubio and Carrasco-Gallego, 2016;Aliaga-Díaz, Olivero, and Powell, 2017;Hollander, 2017;Malherbe, 2017;and Davydiuk, 2017. Haubrich and DeKoning, 2017).…”

Coordination Effects and Optimal Policy Choices of Macroprudential Policy and Monetary Policy

“…Rubio and Carrasco-Gallego studied the macroprudential effect of counter-cyclical capital under Basels I, II, and III. e research showed that the welfare effect of each department was different under various capital ratio requirements and corresponding monetary policy rules were needed to achieve the optimal control effect [15].…”