Macroprudential policy measures: real economy impact and … · 2019-07-16 · Introduction 1...

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

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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

Nominal rigiditiesRigid prices yes yes yes yesRigid wages yes yes yes noRigid nominal interest rates yes yes yes no

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Banks’ capital ratios and total lending

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Investment and consumption

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Output and inflation

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Sensitivity 1: higher equity issuance costs

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Sensitivity 2: higher bank risk

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2 country DKR model: 1pp increase in CR

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

Back

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