Procyclicality of Capital Requirements in a General Equilibrium Model of Liquidity Dependence
AbstractThis paper quantifies the procyclical effects of bank capital requirements in a general equilibrium model where financing of capital goods production is subject to an agency problem. At the center of this problem is the interaction between entrepreneurs’ moral hazard and liquidity provision by banks as analyzed by Holmstrom and Tirole (1998). We impose capital requirements under the assumption that raising funds through bank equity is more costly than raising it through deposits. We consider the time-varying capital requirement (as in Basel II) as well as the constant requirement (as in Basel I). Importantly, under both regimes, the cost of issuing equity is higher during downturns. Comparing output fluctuations under the Basel I and Basel II economies with those in the no-requirement economy, we find that the regulations have relatively minor average effects on output fluctuations (measured by the differences in the standard deviations). However, the effects are more pronounced around business cycle peaks and troughs.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by International Journal of Central Banking in its journal International Journal of Central Banking.
Volume (Year): 6 (2010)
Issue (Month): 34 (December)
Find related papers by JEL classification:
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F31 - International Economics - - International Finance - - - Foreign Exchange
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Skander Van den Heuvel, 2005.
"The Welfare Cost of Bank Capital Requirements,"
2005 Meeting Papers
880, Society for Economic Dynamics.
- Alexis Derviz & Jakub Seidler, 2012.
"Coordination Incentives in Cross-Border Macroprudential Regulation,"
2012/08, Czech National Bank, Research Department.
- Alexis Derviz & Jakub Seidler, 2012. "Coordination Incentives in Cross-Border Macroprudential Regulation," Working Papers IES 2012/21, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2012.
- Ian Christensen & Césaire Meh & Kevin Moran, 2011.
"Bank Leverage Regulation and Macroeconomic Dynamics,"
CIRANO Working Papers
- Ian Christensen & Césaire Meh & Kevin Moran, 2011. "Bank Leverage Regulation and Macroeconomic Dynamics," Working Papers 11-32, Bank of Canada.
- Ian Christensen & Césaire Meh & Kevin Moran, 2011. "Bank Leverage Regulation and Macroeconomic Dynamics," Cahiers de recherche 1140, CIRPEE.
- Kevin Moran & Cesaire A. Meh & Ian Christensen, 2010. "Bank Leverage Regulation and Macroeconomic Dynamics," 2010 Meeting Papers 757, Society for Economic Dynamics.
- Martin Berka & Christian Zimmermann, 2012.
"Basel Accord and Financial Intermediation: The Impact of Policy,"
Working Paper Series
04_12, The Rimini Centre for Economic Analysis.
- Martin Berka & Christian Zimmermann, 2012. "Basel Accord and Financial Intermediation: The Impact of Policy," CESifo Working Paper Series 3724, CESifo Group Munich.
- Martin Berka & Christian Zimmermann, 2011. "Basel Accord and financial intermediation: the impact of policy," Working Papers 2011-042, Federal Reserve Bank of St. Louis.
- Collard, F. & Dellas, H. & Diba, B. & Loisel, O., 2012.
"Optimal Monetary and Prudential Policies,"
413, Banque de France.
- Radde, Sören, 2012. "Liquidity Crises, Banking, and the Great Recession," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 65408, Verein für Socialpolitik / German Economic Association.
- Tommaso Trani, 2012. "Countercyclical Capital Regulation and Bank Ownership Structure," IHEID Working Papers 14-2012, Economics Section, The Graduate Institute of International Studies.
- Sören Radde, 2012. "Flight-to-Liquidity and the Great Recession," Discussion Papers of DIW Berlin 1242, DIW Berlin, German Institute for Economic Research.
- Matthieu Darracq Pariès & Christoffer Kok Sørensen & Diego Rodriguez Palenzuela, 2010.
"Macroeconomic propagation under different regulatory regimes: Evidence from an estimated DSGE model for the euro area,"
Working Paper Series
1251, European Central Bank.
- Matthieu Darracq Pariès & Christoffer Kok Sørensen & Diego Rodriguez-Palenzuela, 2011. "Macroeconomic Propagation under Different Regulatory Regimes: Evidence from an Estimated DSGE Model for the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 49-113, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Timo Laurmaa).
If references are entirely missing, you can add them using this form.