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Capital Requirements and Business Cycles with Credit Market Imperfections

  • Pierre-Richard Agénor
  • Koray Alper
  • Luiz Pereira da Silva

The business cycle effects of bank capital regulatory regimes are examined in a New Keynesian model with credit market imperfections and a cost channel of monetary policy. A key feature of the model is that bank capital increases incentives for banks to monitor borrowers, thereby reducing the probability of default. Basel I- and Basel II-type regulatory regimes are defined, and the model is calibrated for a middle-income country. Numerical simulations show that, depending on the elasticities that relate the repayment probability to its micro and macro determinants, and the elasticity of the risk weight (under Basel II) with respect to the repayment probability, Basel I may be more procyclical than Basel II in response to adverse supply and demand shocks.

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File URL: http://hummedia.manchester.ac.uk/schools/soss/cgbcr/discussionpapers/dpcgbcr124.pdf
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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 124.

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Length: 57 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:man:cgbcrp:124
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