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Macroprudential regulation and macroeconomic activity

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  • Karmakar, Sudipto

Abstract

I develop a dynamic stochastic general equilibrium model to examine the impact of macroprudential regulation on banks’ financial decisions and the implications for the real sector. I model an occasionally binding capital requirement constraint and analyze its costs and benefits. This friction means that the banks refrain from valuable lending. At the same time, capital requirements provide structural stability to the financial system. I show that higher capital requirements can dampen the business cycle fluctuations and raise welfare. I also show that switching to a countercyclical capital requirement regime can help reduce volatility and raise welfare. Finally, by means of the welfare analysis, I also obtain the optimal level of capital requirement.

Suggested Citation

  • Karmakar, Sudipto, 2016. "Macroprudential regulation and macroeconomic activity," Journal of Financial Stability, Elsevier, vol. 25(C), pages 166-178.
  • Handle: RePEc:eee:finsta:v:25:y:2016:i:c:p:166-178
    DOI: 10.1016/j.jfs.2016.06.006
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    Cited by:

    1. Leonardo Gambacorta & Sudipto Karmakar, 2016. "Leverage and Risk Weighted Capital Requirements," Working Papers w201616, Banco de Portugal, Economics and Research Department.
    2. Guangling Liu & Thabang Molise, 2018. "Is Basel III counter-cyclical: The case of South Africa?," Working Papers 10/2018, Stellenbosch University, Department of Economics.

    More about this item

    Keywords

    Capital requirement; Prudential regulation; Financial accelerator; Procyclicality;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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