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Capital requirements and business cycles with credit market imperfections

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  • Agénor, P.-R.
  • Alper, K.
  • Pereira da Silva, L.

Abstract

The business cycle effects of bank capital regulatory regimes are examined in a New Keynesian model with credit market imperfections and a cost channel of monetary policy. Bank capital increases incentives for banks to monitor borrowers, thereby raising the repayment probability, and excess capital generates benefits in terms of reduced regulatory scrutiny. Basel I- and Basel II-type regulatory regimes are defined, and the model is calibrated for a middle-income country. Simulations of a supply shock show that, depending on the elasticity that relates the repayment probability to the bank capital–loan ratio, the Basel II regime may be less procyclical than a Basel I regime.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 34 (2012)
Issue (Month): 3 ()
Pages: 687-705

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Handle: RePEc:eee:jmacro:v:34:y:2012:i:3:p:687-705

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Web page: http://www.elsevier.com/locate/inca/622617

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Keywords: Capital requirements; Procyclicality; Credit market imperfections;

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Cited by:
  1. Luiz Awazu Pereira da Silva & Ricardo Eyer Harris, 2012. "Sailing through the Global Financial Storm: Brazil's recent experience with monetary and macroprudential policies to lean against the financial cycle and deal with systemic risks," Working Papers Series, Central Bank of Brazil, Research Department 290, Central Bank of Brazil, Research Department.
  2. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Macroprudential Regulation and the Monetary Transmission Mechanism," Centre for Growth and Business Cycle Research Discussion Paper Series 185, Economics, The Univeristy of Manchester.
  3. M. Falagiarda & A. Saia, 2013. "Credit, Endogenous Collateral and Risky Assets: A DSGE Model," Working Papers wp916, Dipartimento Scienze Economiche, Universita' di Bologna.
  4. Tabak, Benjamin M. & Takami, Marcelo & Rocha, Jadson M.C. & Cajueiro, Daniel O. & Souza, Sergio R.S., 2014. "Directed clustering coefficient as a measure of systemic risk in complex banking networks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 394(C), pages 211-216.
  5. Luiz A. Pereira da Silva & Adriana Soares Sales & Wagner Piazza Gaglianone, 2012. "Financial Stability in Brazil," Working Papers Series, Central Bank of Brazil, Research Department 289, Central Bank of Brazil, Research Department.
  6. Pierre-Richard AGENOR & Luiz A. PEREIRA DA SILVA, 2011. "Macroeconomic Stability, Financial Stability, and Monetary Policy Rules," Working Papers P29, FERDI.
  7. Pierre-Richard Agénor & K. Alper & L. Pereira da Silva, 2012. "Sudden Floods, Prudential Regulation and Stability in an Open Economy," Working Papers Series, Central Bank of Brazil, Research Department 267, Central Bank of Brazil, Research Department.
  8. 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.
  9. Canuto, Otaviano, 2011. "How Complementary Are Prudential Regulation and Monetary Policy?," World Bank - Economic Premise, The World Bank, The World Bank, issue 60, pages 1-7, June.
  10. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series, Central Bank of Brazil, Research Department 324, Central Bank of Brazil, Research Department.
  11. Otaviano Canuto, 2011. "How Complementary Are Prudential Regulation and Monetary Policy?," World Bank Other Operational Studies 10089, The World Bank.
  12. A. R. Fonseca & F. González & L. Pereira da Silva, 2010. "Cyclical Effects of Bank Capital Buffers with Imperfect Credit Markets: international evidence," Working Papers Series, Central Bank of Brazil, Research Department 216, Central Bank of Brazil, Research Department.
  13. Milcheva, Stanimira, 2013. "Cross-country effects of regulatory capital arbitrage," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5329-5345.

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