A Macroprudential Stable Funding Requirement and Monetary Policy in a Small Open Economy

54 Pages Posted: 4 May 2016

See all articles by Punnoose Jacob

Punnoose Jacob

Reserve Bank of New Zealand

Anella Munro

Reserve Bank of New Zealand

Date Written: May 2, 2016

Abstract

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

Jacob, Punnoose and Munro, Anella Elizabeth, A Macroprudential Stable Funding Requirement and Monetary Policy in a Small Open Economy (May 2, 2016). CAMA Working Paper No. 23/2016 , Available at SSRN: https://ssrn.com/abstract=2773975 or http://dx.doi.org/10.2139/ssrn.2773975

Punnoose Jacob (Contact Author)

Reserve Bank of New Zealand ( email )

2 The Terrace
PO Box 2498
Wellington, 6140
New Zealand

Anella Elizabeth Munro

Reserve Bank of New Zealand ( email )

2 The Terrace
P.O. Box 2498
Wellington, 6011
New Zealand

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