Essays on Monetary Policies and Banking Fragility Case Study

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The paper 'Monetary Policies and Banking Fragility' is a great example of a Macro and Microeconomics Case Study.   Setting capital requirements or share capital is a major policy issue for regulators and ultimately governments in the world over. The recent past is one characterized by a major banking crisis, a financial crisis of 2007-2008 accompanied by a dramatic decline in economic activity and a huge widening in fiscal deficits in various nations however, for the UK, this was probably the most serious banking crisis in its history. In its wake, output fell on a scale that was, on some measures, as serious as during the first stage of what we now call the Great Depression.

It is likely to be the longest of the six depressions since the First World War (Miles, 2011). Following the financial crisis, the cost to the economy of the financial crisis and the scale of public support to the financial sector has been enormous. Mixed opinions underlie most discussions on capital regulations and various monetary policies as well as banking fragility by making maximum use of share capital.

The positivists associating the move with substantial benefits in preventing crises whereas the pessimists link it to imposing costs on the financial system as well as on the economy. This paper is based on the Speech made by David Miles, who aimed at assessing whether an increase in the banking sector's level of equity capital would reduce GDP and make the bank of England task of setting monetary policy more difficult. The question raised is whether Banks move to increase share capital will or will not reduce the level of loan and therefore GDP and whether it is true that increasing capital will increase the cost of bank funds.

This paper, therefore, intends to find answers to the raised questions while reviewing various arguments around the main topic, monetary policies, and banking fragility. The paper will start by defining key terms followed by the main body which will include discussions on the raised questions and finally a conclusion based on analysis and discussions of the foregoing paragraphs.

References

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David Miles, Jing Yang and Gilberto Marcheggiano (2011) Discussion Paper No. 31: revised and expanded version: Optimal bank capital External MPC Unit, Bank of England, Thread needle Street, London

David Miles (2011) Speech: Monetary policy and banking fragility, the London School of Economics, 27 July 2011

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Modigliani, F, and Miller, M (1958) ‘The Cost of Capital, Corporation Finance and the Theory of Investment’. American Economic Review 48 (3): 261–297.

Weichenrieder, A and Klautke, T (2008) ‘Taxes and the efficiency costs of capital distortions’, CESifo Working Paper, No. 2431.

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