HHow does monetary policy impact upon macroprudential regulation?
This paper models monetary policy’s transmission to bank risk
taking, and its interaction with a regulator’s optimization problem.
The regulator uses its macroprudential tool, a leverage ratio, to
maintain financial stability, while taking account of the impact
on credit provision. A change in the monetary policy rate tilts
the regulator’s entire trade-off. We show that the regulator allows
interest rate changes to partly “pass through” to bank soundness by
not neutralizing the risk-taking channel of monetary policy. Thus,
monetary policy affects financial stability, even in the presence of
macroprudential regulatio
