The Bank Capital Regulation and Monetary Policy

Bank capital regulation under Basel Accord has changed the allocation of credit funds and the operation rule of the economy in great degree, and subsequently affected the foundation condition and transmission mechanism of the monetary policies. Given the business cycle, this paper makes the extended analysis of the IS-LM model under capital regulation, and finds that capital regulation will induce the asymmetric effects of monetary policy through the bank lending channel, so theoretically demonstrates that the operation of monetary policy must consider the bank capital regulation. This paper also employs Stochastic Frontiers Analysis to test the joint effectiveness of monetary policy and Bank capital regulation in china from 2000-2009. This test shows that the effectiveness of the monetary policy on realizing economic objective would be weakened by bank capital regulation in China. Therefore, to achieve the objectives of stable price and output, the authority must consider the capital requirement of the banks when enacting the monetary policy,. Key words: Bank capital regulation; Monetary policy; Joint effectiveness