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. Journal of Financial Stability, 26 (C). pp. 144-158. ISSN 1572-3089

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Abstract

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

Item Type:
Journal Article
Journal or Publication Title:
Journal of Financial Stability
Additional Information:
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
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/2000
Subjects:
ID Code:
81559
Deposited By:
Deposited On:
14 Sep 2016 12:50
Refereed?:
Yes
Published?:
Published
Last Modified:
25 Sep 2020 02:45