Abstract
This thesis investigates the interaction of monetary policy and banking regulation and supervision and what it may imply for the design of their institutional setup. Reforms implemented all over the world in the aftermath of the financial crisis aimed not only at revising the institutional arrangements of banking supervision that were in place, but also at introducing a macroprudential oversight of the financial system, as a complement to the microprudential approach, mainly empowering central banks with new financial stability objectives and instruments. Despite the research effort undertaken, it is still unclear whether central banks, which main role is to ensure the price stability, should engage in banking supervisory responsibilities and extend their mandates to embrace financial stability goals. This thesis contributes to this literature by: • Surveying the empirical and theoretical literature concerning the implications of the interactions between these policies for the design of their institutional framework. • Assessing the conflicting goals of price and banking stability. Acknowledging that central banks in charge of banking regulation may be less aggressive in their inflation mandate, in cases in which tight monetary policy conditions could have a negative effect on the stability of the banking system, it has been argued that banking supervisory powers should be assigned to an independent authority to avoid inflation bias. • Revisiting the role of monetary policy in 'leaning against the financial imbalances' and its interaction with macroprudential regulation. • Investigating the transmission mechanisms of different macroprudential policy instruments and their interactions with monetary policy-controlled interest rates, under a New Keynesian (NK) model with two types of financial frictions. For this topic, preliminary findings are shown. We start by showing the lack of both analytical and empirical studies focused on the trade-offs between expected benefits (‘sharing of information’ and ‘expertise’) and expected costs (‘conflict of interests’, ‘reputation risks’, ‘organizational costs’ and ‘balance of powers’) of central bank involvement in banking supervision. The main conclusions from the remaining research work conducted in this thesis are: • Empirically, there is no evidence of an inflationary bias arising from institutional frameworks in which central banks have banking supervisory mandates. • Theoretically, based on a NK framework with a banking system and financial frictions, we find that 'leaning against the financial imbalances' monetary policy rules maximise welfare compared to a standard, conventional Taylor rule. Moreover, the deployment of macroprudential regulation together with standard monetary policy also improves welfare, regardless of the financial target used and the type of policy mandate under assessment (separate or unified). The welfare maximization is achieved under a partially unified mandate featuring a macroprudential rule reacting simultaneously to credit and credit spreads. Inflation stabilization is better accomplished in a separate mandate, with a standard Taylor rule and a macroprudential rule responding to credit and spreads. • When considering loan-to-value (LTV) ratios as a macroprudential tool, preliminary results show that less stricter regulatory requirements for the LTV ratio amplify the propagation mechanism of monetary policy shocks.