Modeling Two Macro Policy Instruments - Interest Rates and Aggregate Capital Requirements

26 Pages Posted: 5 Oct 2011

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Volker Hahn

University of Konstanz

Date Written: September 30, 2011

Abstract

We present a simple neoclassical model to explore how an aggregate bank-capital requirement can be used as a macroeconomic policy tool and how this additional tool interacts with monetary policy. Aggregate bank-capital requirements should be adjusted when the economy is hit by cost-push shocks but should not respond to demand shocks. Moreover, an optimal institutional structure is characterized as follows: First, monetary policy is delegated to an independent and conservative central banker. Second, setting aggregate bank-capital requirements is separated from monetary policy.

Keywords: central banks, banking regulation, capital requirements, optimal monetary policy

JEL Classification: E520, E580, G280

Suggested Citation

Gersbach, Hans and Hahn, Volker, Modeling Two Macro Policy Instruments - Interest Rates and Aggregate Capital Requirements (September 30, 2011). CESifo Working Paper Series No. 3598. Available at SSRN: https://ssrn.com/abstract=1938940

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

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Zurich, 8092
Switzerland
+41 44 632 82 80 (Phone)
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IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Volker Hahn

University of Konstanz ( email )

Box 143
Konstanz, 78457
Germany

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