DO CAPITAL ADEQUACY REQUIREMENTS MATTER FOR MONETARY POLICY?

Authors

  • STEPHEN G. CECCHETTI,

    1. Cecchetti: Barbara and Richard M. Rosenberg Professor of Global Finance and Research Associate, National Bureau of Economic Research, International Business School, Brandeis University, MS 021, P.O. Box 549110, Waltham, MA 02454-9110 and NBER. Phone 1-781-736-2249, Fax 1-781-736-2269, E-mail cecchetti@brandeis.edu
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      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.

  • LIANFA LI

    1. Li: Associate Professor, Department of Finance, School of Economics, Peking University, Beijing 100871, P.R. China. Phone 86-10-62751460, Fax 86-10-62754237, E-mail lfli@pku.edu.cn
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    • *

      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.


Abstract

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)

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