Basel II's procyclical costs

By increasing capital requirements during economic downturns, Basel II will offset improvements in monetary policy trade-offs caused by countercyclical variations, research published by the Bank of Finland finds.

The research shows that in a New Keynesian monetary policy model, current counter-cyclical variations in capital and bank loan rates have a relatively large impact on marginal costs and that this variation improves monetary policy trade-offs.

To read the paper, click here

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