IDEAS home Printed from https://ideas.repec.org/p/lan/wpaper/124138133.html
   My bibliography  Save this paper

Financial Shocks, Loan Loss Provisions and Macroeconomic Stability

Author

Listed:
  • William John Tayler
  • Roy Zilberman

Abstract

This paper studies the interactions between loan loss provisions, business cycles and monetary policy in a New Keynesian model featuring a credit cost channel and endogenous credit default risk. We show that an incurred-loss specific provisioning system induces financial accelerator mechanisms, and generates financial, price and macroeconomic instability. Dynamic provisioning regimes, covering for expected losses over the whole business cycle, significantly improve welfare, and furthermore moderate the (otherwise optimal) anti-inflationary stance in the monetary policy rule. Optimal policy in response to financial shocks calls for a combination of macroprudential dynamic provisioning and conventional monetary policy rules, which exclude financial stability targets.

Suggested Citation

  • William John Tayler & Roy Zilberman, 2014. "Financial Shocks, Loan Loss Provisions and Macroeconomic Stability," Working Papers 124138133, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:124138133
    as

    Download full text from publisher

    File URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/TaylerZilberman_LLP_JAN_2018_.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Popoyan, Lilit & Napoletano, Mauro & Roventini, Andrea, 2017. "Taming macroeconomic instability: Monetary and macro-prudential policy interactions in an agent-based model," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 117-140.
    2. Francesco Lamperti & Antoine Mandel & Mauro Napoletano & Alessandro Sapio & Andrea Roventini & Tomas Balint & Igor Khorenzhenko, 2017. "Taming macroeconomic instability," PSE-Ecole d'économie de Paris (Postprint) hal-03399574, HAL.
    3. repec:hal:spmain:info:hdl:2441/5bnglqth5987gaq6dhju3psjn3 is not listed on IDEAS
    4. Malgorzata Olszak & Iwona Kowalska & Patrycja Chodnicka-Jaworska & Filip Switala, 2016. "Bank-Specific Determinants Of Sensitivity Of Loan-Loss Provisions To Business Cycle," Faculty of Management Working Paper Series 32016, University of Warsaw, Faculty of Management.
    5. Brancaccio, Emiliano & Califano, Andrea & Lopreite, Milena & Moneta, Alessio, 2020. "Nonperforming loans and competing rules of monetary policy: A statistical identification approach," Structural Change and Economic Dynamics, Elsevier, vol. 53(C), pages 127-136.
    6. Pool, Sebastiaan & de Haan, Leo & Jacobs, Jan P.A.M., 2015. "Loan loss provisioning, bank credit and the real economy," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 124-136.
    7. Indrani Manna, 2018. "Can We Still Lean Against the Wind?," Open Economies Review, Springer, vol. 29(2), pages 223-259, April.
    8. repec:hal:spmain:info:hdl:2441/5hussro0tc951q0jqpu8quliqu is not listed on IDEAS
    9. Lilit Popoyan, 2020. "Macroprudential Policy: a Blessing or a Curse?," Review of Economics and Institutions, Università di Perugia, vol. 11(1-2).

    More about this item

    Keywords

    Basel III - Macroprudential Policy; Dynamic Provisions; Borrowing Cost Channel; Monetary Policy; Welfare;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lan:wpaper:124138133. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Giorgio Motta (email available below). General contact details of provider: https://edirc.repec.org/data/delanuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.