Bankâ€™s regulation, asset portfolio choice of banks, and macroeconomic dynamics
AbstractSince the middle of 1990s, the Japanese banks have continuously tilted their asset portfolio towards the government bonds, reducing their lending to Â…rms. In this paper, we investigate the causes and consequences of such changes in the banks behaviors, by introducing the bankâ€™s asset portfolio decision into an otherwise standard New Keynesian model. The banks in our model construct their portfolio under the value at risk constraint, that requires banks repay their debt regardless of the realization of the asset returns. Under the constraint, an increase in down-side risks, tightening of capital requirement rules or deterioration of the banks net worth reduce the banksÂ’ risk taking capacity, and incurs a shrinkage of the bankâ€™s balance sheet and asset rebalancing towards government bond. The changes in banksÂ’ investment decisions dampen output and inflation. Empirical studies suggest that our theoretical predictions are consistent with behavior of the Japanese banks.
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 InfoPaper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-323.
Length: 39 pages
Date of creation: Jul 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-28 (All new papers)
- NEP-BAN-2013-07-28 (Banking)
- NEP-MAC-2013-07-28 (Macroeconomics)
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.