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Modeling Two Macro Policy Instruments - Interest Rates and Aggregate Capital Requirements
(2011)CESifo Working PapersWe present a simple neoclassical model to explore how an aggregate bank-capital requirement can be used as a macroeconomic policy tool and how this additional tool interacts with monetary policy. Aggregate bank-capital requirements should be adjusted when the economy is hit by cost-push shocks but should not respond to demand shocks. Moreover, an optimal institutional structure is characterized as follows: First, monetary policy is delegated ...Working Paper