This paper studies the stabilization properties of time-varying capital requirements in an environment dominated by an oligopolistic banking sector that accumulates capital subject to a leverage adequacy cost. The results indicate that the macroprudential policy can stabilize fluctuations in Brazil’s business and credit cycles by controlling the loan rate and, consequently, affecting the spread in the banking system. A welfare analysis shows that welfare gains from the introduction of macroprudential policy depend on the type of shock that hits the economy, and more banking competition can amplify the benefits of macroprudential policy. The results still highlight those time-varying capital requirements should not be a substitute for monetary policy but a helpful complement to deal with financial problems or adverse sectoral shocks.
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