Simple Implementable Financial Policy Rules
with Mauricio Calani and Javier Moreno
How important, for welfare, is the counter-cyclical capital buffer (CCyB) relative to other —higher and more permanent— bank capital requirements? While there is a 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 and rank the welfare gains of introducing several simple and implementable financial policy (CCyB) rules that co-exist with monetary policy. We find that the institutional design of the financial-policy instruments matters. 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.