Aurélien Espic*, Matteo Rava**

Internal seminars
phd seminar

Aurélien Espic*, Matteo Rava**

Banque de France*, AMSE**
Capital Requirements in Light of Monetary Tightening*
Joint with
Lisa Kerdelhué, Julien Matheron*

IBD Salle 13

Îlot Bernard du Bois - Salle 13

5-9 boulevard Maurice Bourdet
13001 Marseille

Tuesday, June 4 2024| 11:00am to 12:30pm

Lucie Giorgi: lucie.giorgi[at]
Ricardo Guzman: ricardo.guzman[at]
Natalia Labrador: natalia.labrador-bernate[at]
Nathan Vieira: nathan.vieira[at]


*This paper studies the role of capital requirements in a context of monetary tightening. We build a new Keynesian model featuring costly defaults for banks, households, and firms, and estimate it on Euro Area data between 2002 and 2023. We first identify the sources of this unprecedented episode before studying its propagation along financial variables. We then build various counterfactuals to assess how capital requirements have affected the transmission of this shock. We find that although capital requirements reduced the post-Covid expansion, they preserved macroeconomic stability by reducing banks probability of default. More generally, we show that capital requirements do not need to be countercyclical to be efficient: in an inflationary context, they act as automatic stabilizers, by limiting the amplitude of expansionary as well as recessionary shocks.