The new financial regulation in Basel III and monetary policy: A macroprudential approach

Rubio, Margarita; Carrasco-Gallego, Jos� A.

Abstract

The aim of this paper is to study the interaction between Basel I, II and III regulations with monetary policy. In order to do that, we use a dynamic stochastic general equilibrium (DSGE) model with a housing market, banks, borrowers, and savers. Results show that monetary policy needs to be more aggressive when the capital requirement ratio (CRR) increases because the money multiplier decreases. However, this policy combination brings a more stable economic and financial system. We also analyze the optimal way to implement the countercyclical capital buffer stated by Basel III. We propose that the CRR follows a rule that responds to deviations of credit from its steady state. We find that the optimal implementation of this macroprudential rule together with monetary policy brings extra financial stability with respect to Basel I and II.

Citation

Rubio, M., & Carrasco-Gallego, J. A. (2016). The new financial regulation in Basel III and monetary policy: A macroprudential approach. Journal of Financial Stability, 26, 294-305. https://doi.org/10.1016/j.jfs.2016.07.012

• Journal Article Type: Article
• Acceptance Date: Jul 20, 2016
• Online Publication Date: Aug 6, 2016
• Publication Date: 2016-10
• Deposit Date: Nov 9, 2015
• Publicly Available Date: Feb 7, 2020
• Journal: Journal of Financial Stability
• Print ISSN: 1572-3089
• Electronic ISSN: 1572-3089
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 26
• Pages: 294-305
• DOI: https://doi.org/10.1016/j.jfs.2016.07.012
• Keywords: Basel I, Basel II, Basel III, Countercyclical capital buffer, Macroprudential, Capital requirement ratio, Credit, Borrowers, Savers, Banks
• Public URL: https://nottingham-repository.worktribe.com/output/974840
• Publisher URL: http://www.sciencedirect.com/science/article/pii/S1572308916300651