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The Impact Of Banks' Capital Adequacy Regulation On The Economic System: An Agent-Based Approach

Author

Listed:
  • ANDREA TEGLIO

    (Departament d'Economia, Universitat Jaume I, Castellon de la Plana 12071, Castellon, Spain)

  • MARCO RABERTO

    (DIME-DOGE.I, University of Genova, Via Opera Pia 15, 16145, Genova, Italy)

  • SILVANO CINCOTTI

    (DIME-DOGE.I, University of Genova, Via Opera Pia 15, 16145, Genova, Italy)

Abstract

Since the start of the financial crisis in 2007, the debate on the proper level leverage of financial institutions has been flourishing. The paper addresses such crucial issue within the Eurace artificial economy, by considering the effects that different choices of capital adequacy ratios for banks have on main economic indicators. The study also gives us the opportunity to examine the outcomes of the Eurace model so to discuss the nature of endogenous money, giving a contribution to a debate that has grown stronger over the last two decades. A set of 40 years long simulations have been performed and examined in the short (first five years), medium (the following 15 years) and long (the last 20 years) run. Results point out a non-trivial dependence of real economic variables such as the gross domestic product (GDP), the unemployment rate and the aggregate capital stock on banks' capital adequacy ratios; this dependence is in place due to the credit channel and varies significantly according to the chosen evaluation horizon. In general, while boosting the economy in the short run, regulations allowing for a high leverage of the banking system tend to be depressing in the medium and long run. Results also point out that the stock of money is driven by the demand for loans, therefore supporting the theory of endogenous nature of credit money.

Suggested Citation

  • Andrea Teglio & Marco Raberto & Silvano Cincotti, 2012. "The Impact Of Banks' Capital Adequacy Regulation On The Economic System: An Agent-Based Approach," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 15(supp0), pages 1-27.
  • Handle: RePEc:wsi:acsxxx:v:15:y:2012:i:supp0:n:s0219525912500403
    DOI: 10.1142/S0219525912500403
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    More about this item

    Keywords

    Credit markets; capital adequacy ratio; endogenous money; agent-based models;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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