A macroprudential stable funding requirement and monetary policy in a small open economy

Release date
15/04/2016
Reference
DP2016/04
Authors
Punnoose Jacob; Anella Munro
Published as

Jacob, Punnoose and Anella Munro (2018). ‘A prudential stable funding requirement and monetary policy in a small open economy’, Journal of Banking and Finance, Elsevier, Volume 94(C), Pages 89-106, DOI: https://doi.org/10.1016/j.jbankfin.2018.06.004.

ISSN
1177-7567

The Basel III net stable funding requirement, scheduled for adoption in 2018, requires banks to use a minimum share of long-term wholesale funding and deposits to fund their assets. This paper introduces a stable funding requirement (SFR) into a small open economy DSGE model featuring a banking sector with richly-specified liabilities. We estimate the model for New Zealand, where a similar requirement was adopted in 2010, and evaluate the implications of an SFR for monetary policy trade-offs. Altering the steady-state SFR does not materially affect the transmission of most structural shocks to the real economy and hence has little effect on the optimised monetary policy rules. However, a higher steady-state SFR level amplifes the effects of bank funding shocks, adding to macroeconomic volatility and worsening monetary policy trade-offs conditional on these shocks. We find that this volatility can be moderated if optimal monetary or prudential policy responds to credit growth.