Lower bank capital requirements during a financial contraction could induce inflationary pressures which "may serve well" when the economy is facing "deflationary headwinds", according to a working paper published on Friday by the Central Bank of Colombia.

In Macro-prudential policy under moral hazard and financial fragility, Carlos Arango and Oscar Valencia build a DSGE model with a banking sector fragile to runs on demand deposits, before studying how it responds under different monetary and