Bank capital regulation, the lending channel and business cycles
AbstractThis paper develops a Dynamic Stochastic General Equilibrium (DSGE) model to study how the instability of the banking sector can amplify and propagate business cycles. The model builds on Bernanke, Gertler and Gilchrist (BGG) (1999), who consider credit demand friction due to agency cost, but it deviates from BGG in that financial intermediaries have to share aggregate risk with entrepreneurs, and therefore bear uncertainty in their loan portfolios. Unexpected aggregate shocks will drive loan default rate away from expected, and have an impact on both firm and bank's balance sheet via the financial contract. Low bank capital position can create strong credit supply contraction, and have a significant effect on business cycle dynamics. --
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Bibliographic InfoPaper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2009,33.
Date of creation: 2009
Date of revision:
Bank capital regulation; banking instability; financial friction; business cycle;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-02-05 (All new papers)
- NEP-BAN-2010-02-05 (Banking)
- NEP-BEC-2010-02-05 (Business Economics)
- NEP-DGE-2010-02-05 (Dynamic General Equilibrium)
- NEP-MAC-2010-02-05 (Macroeconomics)
- NEP-ORE-2010-02-05 (Operations Research)
- NEP-REG-2010-02-05 (Regulation)
- NEP-RMG-2010-02-05 (Risk Management)
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