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DSGE Model with Interbank Market Failure - The Role of Macro-prudential Policies

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  • Tobias Schuler
  • Luisa Corrado

Abstract

This paper analyses the effects of several macro-prudential policy measures on the banking sector and its linkages to the macroeconomy. We employ a dynamic general equilibrium model with sticky prices, in which banks trade excess funds in the interbank lending market. We find that an increase in the liquidity requirement effectively reduces the impact of an interbank shock on output and employment, while an increased capital requirement propagates only through financial variables as inflation and interest rates. We conclude that stricter liquidity measures which limit inside money creation, dampen the severity of a breakdown in interbank lend- ing. Targeting interbank financing directly through liquidity measures along with a moderate capital requirement generates lower welfare losses. We thereby provide a comprehensive rationale in favor of the regulatory measures in Basel III.

Suggested Citation

  • Tobias Schuler & Luisa Corrado, 2016. "DSGE Model with Interbank Market Failure - The Role of Macro-prudential Policies," 2016 Papers psc747, Job Market Papers.
  • Handle: RePEc:jmp:jm2016:psc747
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    Cited by:

    1. Zhang, Ailian & Wang, Shuyao & Liu, Bai & Fu, Jingyuan, 2020. "How government regulation of interbank financing impacts risk for Chinese commercial banks," Journal of Asian Economics, Elsevier, vol. 66(C).
    2. Cristian ANGHEL, 2019. "Risk management associated with the interbank relationships," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(620), A), pages 87-98, Autumn.

    More about this item

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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