Simple Implementable Financial Policy Rules
(with Mauricio Calani and Javier Moreno)
Abstract: How important, in terms of welfare, is the counter-cyclical capital buffer (CCyB) relative to other —higher and more permanent— bank capital requirements? While there is better understanding of the effect of a cyclical higher capital requirements on banks’ resilience and credit supply, much less is known about the marginal effects of introducing a macroprudential counter-cyclical capital requirement. In this paper, we study the welfare implications of introducing several simple and implementable financial policy (CCyB) rules that coexist with monetary policy. We find that the institutional design of the financial-policy instruments matters for its welfare implications. In particular, a zero lower bound on the CCyB interacts with its counter-cyclical nature and provides a rationale for a positive neutral level. We build our analysis based on a quantitative macro-banking model with two main frictions, nominal rigidities and financial frictions, which we estimate for Chile; a representative small open economy.