Monetary Policy, Banking Supervision and Macro-prudential Regulation

Summary

The institutional mandates between monetary policy and banking supervision remain an open-ended question in academic literature. There appear to be strong arguments for and against separation of policies and the major challenge is to find clear-cut a theoretical answer to the question of what would be the most efficient institutional mandate concerning social welfare.

Objectives

The objective of this project is twofold: first, to assess empirically one of these arguments, that is the “conflict of interest effect”, which claims that institutional mandates of central banks have an important impact on inflation outcomes in the advanced industrialised countries. Particularly, a central bank that is simultaneously responsible for monetary policy and banking supervision may compromise its inflation mandate leading to an inflation bias.

Second, in a DSGE model with a banking sector, we aim to assess the gains from pursuing rules for monetary policy and the capital – loan ratio which share targeting responsibility for inflation, output and financial variables, as opposed to separate assignments consisting of a standard Taylor rule for interest rate policy and a countercyclical rule for capital requirements.

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