Macroprudential regulation, credit spreads and the role of monetary policy

Tayler, William John and Zilberman, Roy (2016) Macroprudential regulation, credit spreads and the role of monetary policy. Discussion Paper. Bank of England.

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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.

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11 Feb 2018 21:13
Last Modified:
30 May 2023 00:58