IDEAS home Printed from https://ideas.repec.org/a/red/issued/17-385.html
   My bibliography  Save this article

Inside Money, Business Cycle, and Bank Capital Requirements

Author

Listed:
  • Jaevin Park

    (University of Mississippi)

Abstract

A search theoretical model is constructed to study bank capital requirements in a perspective of inside money. In the model bank liabilities, backed by bank assets, are useful for exchange, while bank capital is not. When the supply of bank liabilities is not sufficiently large for the trading demand, banks do not issue bank capital in competitive equilibrium. This equilibrium allocation can be sub-optimal when the bank assets are exposed to the aggregate risk. Specifically, a pecuniary externality is generated because banks do not internalize the impact of issuing inside money on the asset prices in general equilibrium. Imposing a capital requirement can improve welfare by raising the prices of bank assets in both states. (Copyright: Elsevier)

Suggested Citation

  • Jaevin Park, 2020. "Inside Money, Business Cycle, and Bank Capital Requirements," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 103-121, April.
  • Handle: RePEc:red:issued:17-385
    DOI: 10.1016/j.red.2019.09.005
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1016/j.red.2019.09.005
    Download Restriction: Access to full texts is restricted to ScienceDirect subscribers and institutional members. See http://www.sciencedirect.com/ for details.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    2. Allen N. Berger & Christa H. S. Bouwman, 2009. "Bank Liquidity Creation," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3779-3837, September.
    3. Jeremy C. Stein, 2012. "Monetary Policy as Financial Stability Regulation," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 57-95.
    4. Emmanuel Farhi & Iván Werning, 2016. "A Theory of Macroprudential Policies in the Presence of Nominal Rigidities," Econometrica, Econometric Society, vol. 84, pages 1645-1704, September.
    5. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    6. Malherbe, Frederic, 2015. "Optimal capital requirements over the business and financial cycles," Working Paper Series 1830, European Central Bank.
    7. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2016. "Safe Asset Scarcity and Aggregate Demand," American Economic Review, American Economic Association, vol. 106(5), pages 513-518, May.
    8. Venky Venkateswaran & Randall Wright, 2014. "Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity," NBER Macroeconomics Annual, University of Chicago Press, vol. 28(1), pages 227-270.
    9. Mark Gertler & Nobuhiro Kiyotaki, 2015. "Banking, Liquidity, and Bank Runs in an Infinite Horizon Economy," American Economic Review, American Economic Association, vol. 105(7), pages 2011-2043, July.
    10. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 175-202, January.
    11. Zhiguo He & Arvind Krishnamurthy & Konstantin Milbradt, 2016. "A Model of Safe Asset Determination," NBER Working Papers 22271, National Bureau of Economic Research, Inc.
    12. Piero Gottardi & Douglas Gale, 2017. "Equilibrium Theory of Banks' Capital Structure," 2017 Meeting Papers 380, Society for Economic Dynamics.
    13. Douglas W. Diamond & Raghuram G. Rajan, 2000. "A Theory of Bank Capital," Journal of Finance, American Finance Association, vol. 55(6), pages 2431-2465, December.
    14. Charles A.E. Goodhart & Anil K. Kashyap & Dimitrios P. Tsomocos & Alexandros P. Vardoulakis, 2012. "Financial Regulation in General Equilibrium," NBER Working Papers 17909, National Bureau of Economic Research, Inc.
    15. Andolfatto, David & Williamson, Stephen, 2015. "Scarcity of safe assets, inflation, and the policy trap," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 70-92.
    16. Timothy J. Kehoe & David K. Levine, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 865-888.
    17. Nobuhiro Kiyotaki & John Moore, 2002. "Evil Is the Root of All Money," American Economic Review, American Economic Association, vol. 92(2), pages 62-66, May.
    18. Anton Korinek & Olivier Jeanne, 2013. "Macroprudential Regulation Versus Mopping Up After the Crash," 2013 Meeting Papers 405, Society for Economic Dynamics.
    19. Guido Lorenzoni, 2008. "Inefficient Credit Booms," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 809-833.
    20. Martine Quinzii, 2016. "Unconventional Monetary Policy and the Safety of the Banking System," 2016 Meeting Papers 1511, Society for Economic Dynamics.
    21. Frederic Boissay & Fabrice Collard, 2016. "Macroeconomics of bank capital and liquidity regulations," BIS Working Papers 596, Bank for International Settlements.
    22. Boyd, John H. & Hakenes, Hendrik, 2014. "Looting and risk shifting in banking crises," Journal of Economic Theory, Elsevier, vol. 149(C), pages 43-64.
    23. Gary Gorton, 2017. "The History and Economics of Safe Assets," Annual Review of Economics, Annual Reviews, vol. 9(1), pages 547-586, September.
    24. Andolfatto, David & Nosal, Ed, 2009. "Money, intermediation, and banking," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 289-294, April.
    25. Quadrini, Vincenzo, 2017. "Bank liabilities channel," Journal of Monetary Economics, Elsevier, vol. 89(C), pages 25-44.
    26. Mathias Dewatripont & Jean Tirole, 2012. "Macroeconomic Shocks and Banking Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 237-254, December.
    27. Begenau, Juliane, 2019. "Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model," Research Papers 3554, Stanford University, Graduate School of Business.
    28. Stephen D. Williamson, 2012. "Liquidity, Monetary Policy, and the Financial Crisis: A New Monetarist Approach," American Economic Review, American Economic Association, vol. 102(6), pages 2570-2605, October.
    29. Kim, Daesik & Santomero, Anthony M, 1988. " Risk in Banking and Capital Regulation," Journal of Finance, American Finance Association, vol. 43(5), pages 1219-1233, December.
    30. Kareken, John H & Wallace, Neil, 1978. "Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition," The Journal of Business, University of Chicago Press, vol. 51(3), pages 413-438, July.
    31. Williamson, Stephen D., 2016. "Scarce collateral, the term premium, and quantitative easing," Journal of Economic Theory, Elsevier, vol. 164(C), pages 136-165.
    32. Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
    33. VanHoose, David, 2007. "Theories of bank behavior under capital regulation," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3680-3697, December.
    34. Piero Gottardi & Douglas Gale, 2017. "Equilibrium Theory of Banks' Capital Structure," 2017 Meeting Papers 380, Society for Economic Dynamics.
    35. Furlong, Frederick T. & Keeley, Michael C., 1989. "Capital regulation and bank risk-taking: A note," Journal of Banking & Finance, Elsevier, vol. 13(6), pages 883-891, December.
    36. International Monetary Fund, 2011. "Macroprudential Policy; What Instruments and How to Use them? Lessons From Country Experiences," IMF Working Papers 11/238, International Monetary Fund.
    37. Nguyen, Thien Tung, 2014. "Bank Capital Requirements: A Quantitative Analysis," Working Paper Series 2015-14, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Constrained inefficiency; Pecuniary externality; Limited commitment;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    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:red:issued:17-385. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.