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

Rubio, Margarita; Carrasco-Gallego, José A.

Authors

José A. Carrasco-Gallego jose.carrasco-gallego@port.ac.uk



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 http://eprints.nottingham.ac.uk/id/eprint/30671
Publisher URL http://www.sciencedirect.com/science/article/pii/S1572308916300651
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0

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