International Economics

<< N°134

Issue Q2 2013  
Monetary policy and capital regulation in the US and Europe  
Ethan Cohen-Cole
Jonathan Morse
The Federal Reserve and the European Central Bank aggressively lowered interest rates during the recent crisis. Both actions were at odds with an anti-inflationary policy stance: in August 2007, inflation expectations were high, particularly in the United States. To explain these actions, we model an economy with a leveraged and regulated financial sector. We find optional Taylor rules using simulated GMM, and find rules consistent with a pro-inflationary reaction during financial crises and a standard output-inflation mandate for the central bank. Our results support procyclical regulation not because of adequacy concerns, but instead due to the impact on monetary policy. Abstract

Monetary policy ; Bank regulation ; European Central Bank ; Keywords
E51 ; E58 ; G18 ; G28 ; JEL classification
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