Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153890
Authors: 
Agur, Itai
Demertzis, Maria
Year of Publication: 
2012
Series/Report no.: 
ECB Working Paper No. 1457
Abstract: 
Why should monetary policy "lean against the wind"? Can’t bank regulation perform its task alone? We model banks that choose both asset volatility and leverage, and identify how monetary policy transmits to bank risk. Subsequently, we introduce a regulator whose tool is a risk-based capital requirement. We derive from welfare that the regulator trades off bank risk and credit supply, and show that monetary policy affects both sides of this trade-off. Hence, regulation cannot neutralize the policy rate’s impact, and monetary policy matters for financial stability. An extension shows how the commonality of bank exposures affects monetary transmission.
Subjects: 
leverage
Macroprudential
monetary transmission
supervision
JEL: 
E43
E52
E61
G01
G21
G28
Document Type: 
Working Paper

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