Tinbergen Revisited: Monetary and Macro-prudential Policy Interactions in a Macroeconomic Agent-based Model with Interbank Market. Popoyan, L., Napoletano, M., & Roventini, A. paper-progress, 2017. abstract bibtex This work employs an agent-based model featuring good, labor, credit and interbank markets to study interactions among monetary and macroprudential policies. The goal is to shed light on which policy mix lowers the vulnerability of the banking sector and fosters macroeconomic stability. The model is built on Popoyan et al. (2017), and features an interbank market akin to the one in the European Monetary Union: a centralized over- the-counter market managed by central clearing counterparty with overnight rate defined by the interest rate corridor system. The model endogenously generates interbank market freezes and banking crises. In this framework we show that the fully-fledged Basel III is the first-best in terms of reduced vulnerability of the banking sector and lower volatility of output. Moreover, minimum capital requirements and counter-cyclical capital buffer allow achieving a second-best result in a leaner regulatory framework. Our results also suggest that a binding regulatory liquidity requirement gives rise to banks reducing credit supply and holding more high-quality liquidity assets on the balance sheet to comply with liquidy coverage ratio. Finally, in line with Tinbergen principle, we show that a leaning against the wind monetary policy (targeting output gap, inflation and credit growth)is effective in reducing the vulnerability of the banking sector only in the absence of prudential financial regulation. In contrast, in a financial system wherein banks have to comply with capital adequacy ratio and countercyclical capital buffer a central banks additional response to the build-up of financial imbalances does not lead to improved outcomes concerning both macroeconomic and financial stability.
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title = {Tinbergen Revisited: Monetary and Macro-prudential Policy Interactions in a Macroeconomic Agent-based Model with Interbank Market},
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abstract = {This work employs an agent-based model featuring good, labor, credit and interbank markets to study interactions among monetary and macroprudential policies. The goal is to shed light on which policy mix lowers the vulnerability of the banking sector and fosters macroeconomic stability. The model is built on Popoyan et al. (2017), and features an interbank market akin to the one in the European Monetary Union: a centralized over- the-counter market managed by central clearing counterparty with overnight rate defined by the interest rate corridor system. The model endogenously generates interbank market freezes and banking crises. In this framework we show that the fully-fledged Basel III is the first-best in terms of reduced vulnerability of the banking sector and lower volatility of output. Moreover, minimum capital requirements and counter-cyclical capital buffer allow achieving a second-best result in a leaner regulatory framework. Our results also suggest that a binding regulatory liquidity requirement gives rise to banks reducing credit supply and holding more high-quality liquidity assets on the balance sheet to comply with liquidy coverage ratio. Finally, in line with Tinbergen principle, we show that a leaning against the wind monetary policy (targeting output gap, inflation and credit growth)is effective in reducing the vulnerability of the banking sector only in the absence of prudential financial regulation. In contrast, in a financial system wherein banks have to comply with capital adequacy ratio and countercyclical capital buffer a central banks additional response to the build-up of financial imbalances does not lead to improved outcomes concerning both macroeconomic and financial stability.},
bibtype = {article},
author = {Popoyan, Lilit and Napoletano, Mauro and Roventini, Andrea},
journal = {paper-progress}
}
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