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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. Colletaz, Gilbert & Levieuge, Grégory & Popescu, Alexandra, 2018. "Monetary policy and long-run systemic risk-taking," Journal of Economic Dynamics and Control, Elsevier, vol. 86(C), pages 165-184.
    2. 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.
    3. Christina Badarau & Grégory Levieuge, 2011. "Assessing the Effects of Financial Heterogeneity in a Monetary Union : A DSGE Approach," Larefi Working Papers 201108, Larefi, Université Bordeaux 4.
    4. 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.
    5. 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.
    6. Grégory Levieuge, 2017. "Explaining and forecasting bank loans. Good times and crisis," Applied Economics, Taylor & Francis Journals, vol. 49(8), pages 823-843, February.
    7. Hory, Marie-Pierre & Levieuge, Grégory & Onori, Daria, 2021. "Public spending, currency mismatch and financial frictions," Journal of International Money and Finance, Elsevier, vol. 116(C).
    8. 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.
    9. Pauline AVRIL & Grégory LEVIEUGE & Camélia TURCU, 2021. "Natural Disasters and Financial Stress: Can Macroprudential Regulation Tame Green Swans?," LEO Working Papers / DR LEO 2913, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    10. repec:hal:psewpa:halshs-00744047 is not listed on IDEAS
    11. 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.
    12. Marie-Pierre HORY & Grégory LEVIEUGE & Daria ONORI, 2018. "The (low) fiscal multiplier when debt is denominated in foreign currency," LEO Working Papers / DR LEO 2583, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    13. 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.
    14. Enrique LOPEZ-BAZO & Elisabet MOTELLON, 2010. "Human Capital and Regional Wage Gaps," EcoMod2010 259600106, EcoMod.

    More about this item

    Keywords

    bank capital channel; monetary policy; prudential regulation; dynamic provisioning;
    All these keywords.

    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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