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Atlanta Marriott Marquis, International 3
Hosted By:
American Economic Association
Banking Regulation in the Macroeconomy
Paper Session
Sunday, Jan. 6, 2019 1:00 PM - 3:00 PM
- Chair: Stijn Claessens, Bank for International Settlements
Financial Intermediation, Capital Accumulation and Crisis Recovery
Abstract
This paper integrates banks into a two-sector neoclassical growth model to account for the fact that a fraction of firms relies on banks to finance their investments. There are four major contributions to the literature: First, although banks’ leverage amplifies shocks, the endogenous response of leverage to shocks is an automatic stabilizer that improves the resilience of the economy. In particular, financial and labor market institutions are essential factors that determine the strength of this automatic stabilization. Second, there is a mix of publicly financed bank re-capitalization, dividend payout restrictions, and consumption taxes that stimulates a Pareto-improving rapid build-up of bank equity and accelerates economic recovery after a slump in the banking sector. Third, the model replicates typical patterns of financing over the business cycle: procyclical bank leverage, procyclical bank lending, and countercyclical bond financing. Fourth, the framework preserves its analytical tractability wherefore it can serve as a macro-banking module that can be easily integrated into more complex economic environments.Financial and Regulatory Cycles
Abstract
This paper studies the evolution of aggregate savings and bank leverage in the run up to financial crises, within a non-linear macro-model. The dynamics to crises features a savings glut (a “push” factor) and/or the emergence of inefficient shadow banking activities (a “pull factor”). Shadow banking arises as an endogenous response of banks to bank capital regulation. Simulations of a calibrated version of the model determine the relevance of pull and push factors in the build-up of financial imbalances. The paper shows that the two types of imbalances call for distinct macro-prudential policies.Risk-Centric Model of Demand Recessions and Macroprudential Policy
Abstract
We theoretically analyze the interactions between asset prices, financial speculation, and macroeconomic outcomes when output is determined by aggregate demand. If the interest rate is constrained, a rise in the risk premium lowers asset prices and generates a demand recession. This reduces earnings and generates a feedback loop between asset prices and aggregate demand. The recession is exacerbated by speculation due to heterogeneous asset valuations during the ex-ante low-risk-premium period. Macroprudential policy that restricts speculation can Pareto improve welfare. We also provide empirical support for the mechanisms by comparing impulse responses to house price shocks within and outside the Eurozone.JEL Classifications
- G2 - Financial Institutions and Services
- E3 - Prices, Business Fluctuations, and Cycles