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The Bank Capital Channel and Counter-Cyclical Prudential Regulation in a DSGE model

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  • Grégory Levieuge

Abstract

This 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 Info

Article provided by De Boeck Université in its journal Recherches économiques de Louvain.

Volume (Year): 75 (2009)
Issue (Month): 4 ()
Pages: 425-460

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Handle: RePEc:cai:reldbu:rel_754_0425

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Web page: http://www.cairn.info/revue-recherches-economiques-de-louvain.htm

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Keywords: bank capital channel; monetary policy; prudential regulation; dynamic provisioning;

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Cited by:
  1. Thepthida Sopraseuth & Eleni Iliopulos, 2012. "L'intermédiation financière dans l'analyse macroéconomique : le défi de la crise," Économie et Statistique, Programme National Persée, vol. 451(1), pages 91-130.
  2. Florina-Cristina Badarau & Grégory Levieuge, 2011. "Assessing the Effects of Financial Heterogeneity in a Monetary Union : A DSGE Approach," Working Papers hal-00641984, HAL.
  3. Pierre-Richard Agénor & Koray Alper & Luiz Pereira da Silva, 2011. "Capital Regulation, Monetary Policy and Financial Stability," Centre for Growth and Business Cycle Research Discussion Paper Series 154, Economics, The Univeristy of Manchester.
  4. Grégory Levieuge, 2010. "Commentaire : Effets de richesse : le cas français. Les effets de richesse importent moins que les effets de bilan," Économie et Statistique, Programme National Persée, vol. 438(1), pages 141-149.
  5. repec:hal:psewpa:halshs-00744047 is not listed on IDEAS

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