A Macroprudential Stable Funding Requirement and Monetary Policy in a Small Open Economy
54 Pages Posted: 4 May 2016
Date Written: May 2, 2016
The Basel III net stable funding requirement, scheduled for adoption in 2018, requires banks to use a minimum share of long-term wholesale funding and deposits to fund their assets. A similar regulation has been in place in New Zealand since 2010. This paper introduces the stable funding requirement (SFR) into a DSGE model featuring a banking sector with richly-specified liabilities, and estimates the model for New Zealand. We then evaluate the implications of an SFR for monetary policy trade-offs. Altering the steadystate SFR does not materially affect the transmission of most structural shocks to the real economy and hence has little effect on the optimised monetary policy rules. However, a higher steady-state SFR level amplifies the effects of bank funding shocks, adding to macroeconomic volatility and worsening monetary policy trade-offs conditional on these shocks. We find that this volatility can be moderated if optimal monetary or prudential policy responds to credit growth.
Keywords: DSGE models, prudential policy, monetary policy, small open economy, sticky interest rates, banks, wholesale funding
JEL Classification: E31, E32, E44, F41
Suggested Citation: Suggested Citation