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The Macroeconomic Implications of Changes in Bank Capital and Liquidity Requirements in Canada: Insights from the BoC-GEM-FIN

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Author Info

  • Carlos de Resende
  • Ali Dib
  • Nikita Perevalov

Abstract

The authors use simulations within the BoC-GEM-FIN, the Bank of Canada’s version of the Global Economy Model with financial frictions in both the demand and supply sides of the credit market, to investigate the macroeconomic implications of changing bank regulations on the Canadian economy. Specifically, they compute short- and long-run impacts on key macroeconomic and financial variables following increases in the minimum required capital and liquidity ratios. The results indicate that, while long-run effects on bank loans, lending spreads, investment, and output are modest, the short-run effects are non-negligible. In addition, the time horizon for implementing the regulatory changes and the response of monetary policy substantially affect the macroeconomic outcomes. Finally, increasing the required bank capital ratio in other economies roughly doubles the size and duration of the economic downturn in Canada, compared to the case where the increase is implemented only in the Canadian banking sector.

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File URL: http://www.bankofcanada.ca/en/res/dp/2010/dp10-16.pdf
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Bibliographic Info

Paper provided by Bank of Canada in its series Discussion Papers with number 10-16.

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Length: 38 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:bca:bocadp:10-16

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Keywords: Financial institutions; Economic models; Financial stability; International topics;

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Cited by:
  1. Kozicki, Sharon, 2012. "Macro has progressed," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 23-28.
  2. Schaetzle, Dominik, 2012. "Die Auswirkungen der neuen Eigenkapitalanforderungen nach Basel III: Eine Analyse empirischer Studien," Arbeitspapiere 124, Westfälsche Wilhelms-Universität Münster (WWU), Institut für Genossenschaftswesen.

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