The Bank Capital Channel and Counter-Cyclical Prudential Regulation in a DSGE model
AbstractThis article proposes to insert a bank capital channel (BCC) in the theoretical framework proposed by Bernanke et al. (1999) (BGG), in order 1) to evaluate the mean features of the BCC and 2) to assess the benefits of a countercyclical prudential measure. In a costly state verification framework, banks are charged a financing premium on their external funds which depends on the structure of their balance sheets and which then fluctuates in a counter-cyclical way. This premium is lastly passed on to firms? credit conditions. Simulations confirm that shocks are more amplified than in the BGG model, and confirm the importance of the financial context for macroeconomic volatility. Given the effects of this channel and the ineffectiveness of monetary policy in a capital crunch context, the model finally allows a conclusive evaluation of the advantages associated with a preemptive and counter-cyclical prudential measure in a DSGE model to be made. JEL code: E3, E5, G18
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Bibliographic InfoArticle provided by De Boeck Université in its journal Recherches économiques de Louvain.
Volume (Year): 75 (2009)
Issue (Month): 4 ()
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Web page: http://www.cairn.info/revue-recherches-economiques-de-louvain.htm
bank capital channel; monetary policy; prudential regulation; dynamic provisioning;
Other versions of this item:
- Gregory Levieuge, 2009. "The Bank Capital Channel and Counter-Cyclical Prudential Regulation in a DGSE Model," Discussion Papers (REL - Recherches Economiques de Louvain) 2009042, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
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