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The Bank Capital Channel and Counter-Cyclical Prudential Regulation in a DSGE model

Author

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  • Grégory Levieuge

Abstract

This article proposes to insert a bank capital channel (BCC) in the theoretical framework proposed by Bernanke et al. (1999) (BGG), in order 1) to evaluate the mean features of the BCC and 2) to assess the benefits of a countercyclical prudential measure. In a costly state verification framework, banks are charged a financing premium on their external funds which depends on the structure of their balance sheets and which then fluctuates in a counter-cyclical way. This premium is lastly passed on to firms’ credit conditions. Simulations confirm that shocks are more amplified than in the BGG model, and confirm the importance of the financial context for macroeconomic volatility. Given the effects of this channel and the ineffectiveness of monetary policy in a capital crunch context, the model finally allows a conclusive evaluation of the advantages associated with a preemptive and counter-cyclical prudential measure in a DSGE model to be made. JEL code: E3, E5, G18

Suggested Citation

  • Grégory Levieuge, 2009. "The Bank Capital Channel and Counter-Cyclical Prudential Regulation in a DSGE model," Recherches économiques de Louvain, De Boeck Université, vol. 75(4), pages 425-460.
  • Handle: RePEc:cai:reldbu:rel_754_0425
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    Cited by:

    1. R. P. Agenor & K. Alper & L. Pereira da Silva, 2013. "Capital Regulation, Monetary Policy, and Financial Stability," International Journal of Central Banking, International Journal of Central Banking, vol. 9(3), pages 198-243, September.
    2. Cristina Badarau-Semenescu & Andreea Semenescu, 2010. "Fiscal Policy and the Cost of External Finance to Firms," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(0), pages 36-50, May.
    3. Grégory Levieuge, 2010. "Commentaire : Effets de richesse : le cas français. Les effets de richesse importent moins que les effets de bilan," Économie et Statistique, Programme National Persée, vol. 438(1), pages 141-149.
    4. repec:taf:applec:v:49:y:2017:i:8:p:823-843 is not listed on IDEAS
    5. Badarau, Cristina & Levieuge, Grégory, 2011. "Assessing the effects of financial heterogeneity in a monetary union a DSGE approach," Economic Modelling, Elsevier, vol. 28(6), pages 2451-2461.
    6. Cristina Badarau-Semenescu & Andreea Semenescu, 2010. "Fiscal Policy and the Cost of External Finance to Firms," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(0), pages 36-50, May.
    7. Eleni Iliopulos & Thepthida Sopraseuth, 2012. "L'intermédiation financière dans l'analyse macroéconomique : le défi de la crise," Économie et Statistique, Programme National Persée, vol. 451(1), pages 91-130.
    8. G.Levieuge, 2015. "the coherence and the predictive content of the French Bank Lending Survey’s indicators (in French)," Working papers 567, Banque de France.
    9. Grégory Levieuge, 2017. "Explaining and forecasting bank loans. Good times and crisis," Applied Economics, Taylor & Francis Journals, vol. 49(8), pages 823-843, February.
    10. Gilbert COLLETAZ & Grégory LEVIEUGE & Alexandra POPESCU, 2016. "Monetary Policy and Long-Run Risk-Taking," LEO Working Papers / DR LEO 2409, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    11. repec:eee:dyncon:v:86:y:2018:i:c:p:165-184 is not listed on IDEAS
    12. repec:hal:psewpa:halshs-00744047 is not listed on IDEAS
    13. Enrique LOPEZ-BAZO & Elisabet MOTELLON, "undated". "Human Capital and Regional Wage Gaps," EcoMod2010 259600106, EcoMod.

    More about this item

    Keywords

    bank capital channel; monetary policy; prudential regulation; dynamic provisioning;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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