Template-Type: ReDIF-Paper 1.0 Author-Name: William Tayler Author-Name-First: William Author-Name-Last: Tayler Author-Name: Roy Zilberman Author-Name-First: Roy Author-Name-Last: Zilberman Title: Macroprudential regulation and the role of monetary policy 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.
Creation-Date: 2014 File-URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/MacroprudentialRegulation.pdf File-Format: application/pdf Number: 63933064 Classification-JEL: Keywords: Handle: RePEc:lan:wpaper:63933064