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The impact of banks’ capital adequacy regulation on the economic system: an agent-based approach

  • Andrea Teglio

    ()

    (LEE & Department of Economics, Universitat Jaume I, Castellón, Spain)

  • Marco Raberto

    ()

    (University of Genova, Genova, Italy)

  • Silvano Cincotti

    ()

    (University of Genova, Genova, Italy)

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 arti?cial 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 5 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.

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File URL: http://www.doctreballeco.uji.es/wpficheros/teglioetal2011.pdf
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Paper provided by Economics Department, Universitat Jaume I, Castellón (Spain) in its series Working Papers with number 2011/01.

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Length: 20 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:jau:wpaper:2011/01
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  1. Philip Arestis & Malcolm Sawyer, 2006. "The nature and role of monetary policy when money is endogenous," Cambridge Journal of Economics, Oxford University Press, vol. 30(6), pages 847-860, November.
  2. Caballero, Ricardo J, 1992. "A Fallacy of Composition," American Economic Review, American Economic Association, vol. 82(5), pages 1279-92, December.
  3. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
  4. Blum, Jurg & Hellwig, Martin, 1995. "The macroeconomic implications of capital adequacy requirements for banks," European Economic Review, Elsevier, vol. 39(3-4), pages 739-749, April.
  5. Cincotti, Silvano & Raberto, Marco & Teglio, Andrea, 2010. "Credit money and macroeconomic instability in the agent-based model and simulator Eurace," Economics Discussion Papers 2010-4, Kiel Institute for the World Economy.
  6. Peter Kriesler & Marc Lavoie, 2007. "The New Consensus on Monetary Policy and its Post-Keynesian Critique," Review of Political Economy, Taylor & Francis Journals, vol. 19(3), pages 387-404.
  7. Martin Hellwig, 2010. "Capital Regulation after the Crisis: Business as Usual?," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2010_31, Max Planck Institute for Research on Collective Goods.
  8. Giuseppe Fontana, 2003. "Post Keynesian Approaches to Endogenous Money: A time framework explanation," Review of Political Economy, Taylor & Francis Journals, vol. 15(3), pages 291-314.
  9. Angelini, P. & Clerc, L. & Cúrdia, V. & Gambacorta, L. & Gerali, A. & Locarno, A. & Motto, R. & Roeger, W. & Van den Heuvel, S. & Vlcek, J., 2011. "BASEL III: Long-term impact on economic performance and fluctuations," Working papers 323, Banque de France.
  10. Ricardo J. Caballero, 2010. "Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 85-102, Fall.
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