Macroprudential policy measures: real economy impact and interaction with monetary policy* *The views expressed here are of the authors, not necessarily those of the European Central Bank Cozzi, Gabriele Darracq-Paries, Matthieu Karadi, Peter Koerner, Jenny Kok, Christoffer Mazelis, Falk Nikolov, Kalin Rancoita, Elena Van der Ghote, Alejandro Weber, Julien (All ECB) 3 July 2019 ECB Central Banking Seminar 2019, Frankfurt-am-Main Macroprudential policy measures 1 / 29
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Macroprudential policy measures: real economy impact and … · 2019-07-16 · Introduction 1 Technical paper on the interaction of monetary and macroprudential policy under the Research
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Macroprudential policy measures:
real economy impact and
interaction with monetary policy*
*The views expressed here are of the authors, not necessarily those of the
European Central Bank
Cozzi, Gabriele
Darracq-Paries, Matthieu
Karadi, Peter
Koerner, Jenny
Kok, Christoffer
Mazelis, Falk
Nikolov, Kalin
Rancoita, Elena
Van der Ghote, Alejandro
Weber, Julien
(All ECB)
3 July 2019
ECB Central Banking Seminar 2019, Frankfurt-am-Main
Macroprudential policy measures 1 / 29
Introduction
1 Technical paper on the interaction of monetary and macroprudentialpolicy under the Research Task Force (RTF)
2 Main tasks:- showcase existing macroeconomic models that can be used toanalyse the macroeconomic impact of macroprudential measures- examine how macropru interacts with monetary policy
3 Team: G. Cozzi (DG-MF), M. Darracq-Paries (DG-E), P. Karadi(DG-R), J. Koerner (DG-MP), C. Kok (DG-MF), F. Mazelis(DG-MP), K. Nikolov (DG-R), E. Rancoita (DG-MF), A. van derGhote (DG-R) and J. Weber (DG-R)
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Main questions of the Paper
1 The transmission mechanism of a capital requirement increase:comparing the medium-scale macro models at the ECB
2 How is the transmission mechanism of a capital requirement increaseaffected by the conduct of monetary policy?
3 How is the transmission mechanism of monetary policy affected bybank leverage and the conduct of macroprudential policy?
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Main findings Q1
Long run impact depends on the health of the banking system(benefits of higher capital requirements)
Short run impact is negative in all models: output falls by 0.15-0.35%(bank capital channel)
Short run bank lending impact moderated by:- voluntary buffer adjustment- sticky loan rates- lower bank debt funding costs- dividend cuts
Output impact of lending decline moderated by ability of corporatesector to obtain non-bank financing
2 country model: capital requirements create spillovers and have aheterogeneous impact across countries
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Main findings Q2
A strong Taylor rule inflation response reduces the macroeconomicimpact of higher capital requirements in all the models- maintains aggregate demand as lending and investment fall
In an EMU setting, larger countries see a smaller fall in activity- larger share in EMU-wide inflation so a stronger monetary reaction
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Main findings Q3
Monetary policy stronger under high financial system leverage- bank capital channel is stronger
Demand shock impact is the same in normal times- bigger direct shock effect but more powerful monetary offset
... but larger impact at the ZLB with a levered financial system
Asset purchases more effective with undercapitalized banks- bank risk-taking strongest when default risk is high
Optimal macroprudential policy increases r* when banks areundercapitalized and reduces it when banks are highly capitalized.
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The transmission mechanism of a capital requirement increase: comparingthe medium-scale macroprudential models at the ECB
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Model characteristics
NAWM II DKR DJP 3DKey features of the banking frameworkBank failures no no yes yesIssue new equity/cut dividends no no no yesChange voluntary capital buffers no yes yes noNon-bank funding sources for firms yes no no yes
Domestic real GDP Foreign real GDP Domestic credit
Foreign credit Policy rate Domestic inflation
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How is the transmission mechanism of a capital requirement increaseaffected by the conduct of monetary policy?
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The conduct of monetary policy
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How is the transmission mechanism of monetary policy affected by bankleverage and the conduct of macroprudential policy?
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Three key transmission channels
1 The bank capital channel, bank leverage and monetary policy- Variants of the GK model
2 The bank risk taking channel and the impact of asset purchases- Variant of the DJP model extended for unconventional monetarypolicy
3 Macroprudential policy, endogenous risk, precautionary savings andthe natural real interest rate- Continuous time GK model with endogenous risk
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Gertler and Karadi (2011) and Mazelis (2018)
How does financial system leverage affect the response of the economy toshocks?
1 Gertler and Karadi (2011):
- monetary shock more amplified when banks are levered- greater ability to offset demand shocks in normal times- larger impact of demand shocks at the ZLB
2 Mazelis (2018):
- a version of the GK model with a shadow banking sector- a levered shadow banking system amplifies shocks at the ZLB
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Monetary policy has a larger impact at higher bankleverage
Figure: Response to a monetary policy shock
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No change in the impact of a demand shock
Figure: Response to a demand shock
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... unless we hit the ZLB
Figure: Response to a demand shock at the zero lower bound
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Levered shadow banks amplify demand shocks at the ZLB
Introduction • Model Setup • Model Dynamics • ZLB Analysis • Robustness • Conclusion
ZLB Episodes for different Credit Economies
Zer
oL
ower
Bo
un
dU
nco
nst
rain
ed
0 10 20
-8
-6
-4
-2
0
Output
0 20 40
0.99
0.995
1
1.005
1.01
1.015
Real rate
0 10 20-2
0
2
4
Aggregate lending
0 10 20
-2
0
2
4
Commercial bank lending
0 10 20
-4
-20
24
6
Investment fund lending
Bank dependent Fund dependent
Figure: Horizontal axes show periods in quarters, vertical axes are percentagedeviations from steady state.
Interest rates
Falk Mazelis (ECB) Shadow Banking Regulation and the ZLB
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Darracq-Paries, Koerner and Papadopoulou (2019)
How does macroprudential policy affect the transmission of central bankasset purchases?
- Bank risk taking channel amplifies the impact of asset purchases
- Stronger when banks have a high failure risk
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Non-standard monetary policy: comparing weaklycapitalised and well-capitalised banking sector
More
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van der Ghote (2018)
Implications of macro-prudential policy for the frequency, duration, andintensity of liquidity traps
- Macroprudential policy affects endogenous risk and hence r*
- Bad times: less endogenous risk hence higher r*
- Good times: binding capital requirements hence lower r*
- Liquidity trap episodes less severe but more frequent
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Optimal macro-prudential policy in van der Ghote (2018)
Figure: Socially Optimal Macro-prudential Policy.
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Macroprudential policy and the neutral interest rate
Figure: Neutral Rate under Socially Optimal and Laissez-faire Macro-prudentialPolicy.
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Summary
Modest ST and LT impact from higher capital requirements.
LT impact depends on bank riskiness- could be positive if banks are under-capitalized
ST impact depends on:- the ability of banks to adjust in ways other than cutting loans- the ability of firms to substitute away from bank loans- the reaction of monetary policy
In an EMU setting, larger countries:- experience smaller ST GDP declines- generate greater spillovers to other countries
Risky/levered banks amplify the impact of monetary policy
Optimal macroprudential policy changes endogenous risk and affectsthe natural real interest rate
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Backup slides
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Non-standard monetary policy: comparing weaklycapitalised and well-capitalised banking sector