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5 - The Macroprudential Countercyclical Capital Buffer in Basel III

Implications for Monetary Policy

Published online by Cambridge University Press:  09 August 2018

By
José A. Carrasco-Gallego  and
Margarita Rubio
Edited by
Paul Mizen ,
Margarita Rubio  and
Philip Turner
Paul Mizen
Affiliation:
University of Nottingham
Margarita Rubio
Affiliation:
University of Nottingham
Philip Turner
Affiliation:
Universität Basel, Switzerland
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Summary

Basel III is a comprehensive set of reform measures in banking regulation, supervision and risk management with a strong macroprudential component, which has the aim of preventing future crises by creating a sound financial system. Nevertheless, these changes on financial regulation have to co-ordinate with monetary policy. We address several key research questions. First, we analyse how the higher capital requirements implied by Basel I, II and III affect welfare for a given monetary policy of different agents in the economy. Second, we study how these regulations affect the way monetary policy needs to be conducted. Finally, we propose an automatic rule to implement the macroprudential countercyclical buffer in Basel III and find the optimal parameters for this rule and for monetary policy. We conclude that a Pareto-superior outcome can be reached using the optimal values, and the macroprudential objective can be achieved.

Type
Chapter
Information
Macroprudential Policy and Practice , pp. 108 - 134
Publisher: Cambridge University Press
Print publication year: 2018

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