This paper explores the interaction between monetary policy and prudential
regulation in an agent-based modeling framework. Firms borrow funds from the
banking system in an economy regulated by a central bank. The central bank carries
out monetary policy, by setting the interest rate, and prudential regulation, by establishing
the banking capital requirement. Different combinations of interest rate rule
and capital requirement rule are evaluated with respect to both macroeconomic and
financial stability. Several relevant policy implications were drawn. First, the efficacy
of a given capital requirement rule or interest rate rule depends on the specification of
the rule of the other type it is combined with. More precisely, less aggressive interest
rate rules perform better when the range of variation of the capital requirement is
narrower. Second, interest rate smoothing is more effective than the other interest rate
rules assessed, as it outperforms those other rules with respect to financial stability and

• Combining monetary policy and prudential regulation: an agent-based modeling approachv