Systemic Risk, Banking Regulation and Optimal Monetary Policy∗ Draft Copy- Not for Circulation or Citation

In this paper, we study the role of the credit channel of monetary policy in a synthesis model of the economy. Specifically, we ask whether the combination of well-described fnancial intermediation channel in the form of banks along with capital regulations induce monetary policy that consistent with observed patterns. Our paper has two primary contributions. One, through the use of a well-specific banking sector and a regulatory capital constraint on lending, we provide an alternate mechanism that can explain the periods of asymmetry in monetary policy without appealing to ad-hoc central bank preferences. Two, we provide the framework via which one can evaluate the relevance of combining monetary policy and bank regulation in a single entity