Inflation targeting and bank equity rules: Parallels and lessons
This column suggests that there are surprising parallels between inflation targeting and bank capital requirements. It shows they could inform each other.
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This column suggests that there are surprising parallels between inflation targeting and bank capital requirements. It shows they could inform each other.
In the course of the last two decades, many central banks have adopted inflation targeting, i.e. they have specified numerical targets for inflation and committed themselves to reaching those targets in the medium term. Inflation targeting is considered best-practice monetary policymaking (for discussions of this monetary-policy strategy see Bernanke et al. 1999, Cecchetti 2006, Gersbach and Hahn 2006, Leiderman and Svensson 1995, Woodford 2008).
Regulatory authorities supervise private banks. One of their aims is to ensure that banks fulfil equity capital requirements. While at first sight inflation targeting and capital requirements seem to have little in common, we argue that there are some surprising parallels between them. These parallels may enable us to draw lessons for bank regulation from inflation targeting and vice versa.
ParallelsWhether current banking regulation pays adequate attention to commitment problems is a question we take up in the next section.
There are four lessons to be learned from these parallels.
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