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The Role of Bank Capital in the Propagation of Shocks Author info | Abstract | Publisher info | Download info | Related research | Statistics Césaire Meh
Kevin Moran
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Recent events in financial markets have underlined the importance of analyzing the link between the financial health of banks and real economic activity. This paper contributes to this analysis by constructing a dynamic general equilibrium model in which the balance sheet of banks affects the propagation of shocks. We use the model to conduct quantitative experiments on the economy's response to technology and monetary policy shocks, as well as to disturbances originating within the banking sector, which we interpret as episodes of distress in financial markets. We show that, following adverse shocks, economies whose banking sectors remain well-capitalized experience smaller reductions in bank lending and less pronounced downturns. Bank capital thus increases an economy's ability to absorb shocks and, in doing so, affects the conduct of monetary policy. The model is also used to shed light on the ongoing debate over bank capital regulation.
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Paper provided by Bank of Canada in its series Working Papers with number
08-36.
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Length: 37 pages
Date of creation: 2008Date of revision:
Handle: RePEc:bca:bocawp:08-36Contact details of provider: Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada Phone: 613 782-8899 Fax: 613 782-8874 Web page: http://www.bank-banque-canada.ca/
Order Information: Postal: Publications Distribution, Bank of Canada, 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada Email: Web: http://www.bank-banque-canada.ca/en/publication/pub_res.html
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Keywords: Transmission of monetary policy ; Financial institutions ; Financial system regulation and policies ; Economic models ; Find related papers by JEL classification: E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
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