Macroprudential Policy in the New Keynesian World

60 Pages Posted: 12 Sep 2018

See all articles by Hans Gersbach

Hans Gersbach

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

Volker Hahn

University of Konstanz

Yulin Liu

Huazhong University of Science and Technology

Date Written: August 21, 2018

Abstract

We integrate banks and the coexistence of bank and bond financing into an otherwise standard New Keynesian framework. There are two policy-makers: a central banker, who can decide on short-term nominal interest rates, and a macroprudential policy-maker, who can vary aggregate capital requirements. The two policy instruments can be used to stabilize shocks, to moderate bank credit cycles, and to induce a more efficient allocation of resources across sectors. Moreover, we investigate the optimal combination of simple policy rules for interest rates and capital requirements. The optimal policy rules imply that the central bank should focus exclusively on price stability and the macroprudential policy-maker should react exclusively to changes in loan rate premia.

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

JEL Classification: E520, E580, G280

Suggested Citation

Gersbach, Hans and Hahn, Volker and Liu, Yulin, Macroprudential Policy in the New Keynesian World (August 21, 2018). Available at SSRN: https://ssrn.com/abstract=3241308 or http://dx.doi.org/10.2139/ssrn.3241308

Hans Gersbach (Contact Author)

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

Zürichbergstrasse 18
Zurich, 8092
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+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
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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

Yulin Liu

Huazhong University of Science and Technology ( email )

Hongshan District Luoyu Road 1037
School of Economics
Wuhan, Hubei 430074
China

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