Description

How does monetary policy impact upon macroprudential regulation? This paper models
 monetary policy's transmission to bank risk taking, and its interaction with a regulator's
 optimization problem. The regulator uses its macroprudential tool, a leverage ratio, to
 maintain financial stability, while taking account of the impact on credit provision. A change
 in the monetary policy rate tilts the regulator's entire trade-off. We show that the regulator
 allows interest rate changes to partly "pass through" to bank soundness by not neutralizing
 the risk-taking channel of monetary policy. Thus, monetary policy affects financial stability,
 even in the presence of macroprudential regulation.

More publications in this series: Working Papers

More publications by: Itai Agur ; Maria Demertzis