We would like to thank David VanHoose and Kenneth West, as well as numerous conference and seminar participants, for their comments on earlier versions of this paper.
DO CAPITAL ADEQUACY REQUIREMENTS MATTER FOR MONETARY POLICY?
Article first published online: 30 AUG 2007
© 2007 Western Economic Association International
Volume 46, Issue 4, pages 643–659, October 2008
How to Cite
CECCHETTI, S. G. and LI, L. (2008), DO CAPITAL ADEQUACY REQUIREMENTS MATTER FOR MONETARY POLICY?. Economic Inquiry, 46: 643–659. doi: 10.1111/j.1465-7295.2007.00085.x
- Issue published online: 22 OCT 2008
- Article first published online: 30 AUG 2007
- Online Early publication August 30, 2007
Central bankers and financial supervisors can have conflicting goals. While monetary policymakers work to ensure sufficient lending activities as a foundation for high and stable economic growth, supervisors may limit banks’ lending capacities in order to prevent excessive risk taking. We show that, in theory, central bankers can avoid this potential conflict by adopting an interest rate strategy that takes accounts of capital adequacy requirements. Empirical evidence suggests that while policymakers at the Federal Reserve have adjusted their interest rate to neutralizing the procyclical impact of bank capital requirements, those in Germany and Japan have not. (JEL E52, E58, G21)