Working Paper: CEPR ID: DP10316
Authors: Laurent Clerc; Alexis Derviz; Caterina Mendicino; Stéphane Moyen; Kalin Nikolov; Livio Stracca; Javier Suarez; Alexandros P. Vardoulakis
Abstract: We develop a dynamic general equilibrium model for the positive and normative analysis of macroprudential policies. Optimizing financial intermediaries allocate their scarce net worth together with funds raised from saving households across two lending activities, mortgage and corporate lending. For all borrowers (households, firms, and banks) external financing takes the form of debt which is subject to default risk. This "3D model" shows the interplay between three interconnected net worth channels that cause financial amplification and the distortions due to deposit insurance. We apply it to the analysis of capital regulation.
Keywords: default risk; financial frictions; macroprudential policy
JEL Codes: E3; E44; G01; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher capital requirements (G28) | Reduce bank leverage (G21) |
| Reduce bank leverage (G21) | Lower failure risk (G33) |
| Lower failure risk (G33) | Reduce implicit subsidies associated with deposit insurance (G28) |
| Higher capital requirements (G28) | More stable credit supply (E51) |
| Low capital requirements (G29) | Increased vulnerability of banks to shocks (F65) |
| Increased vulnerability of banks to shocks (F65) | Increased volatility in credit supply (E51) |
| Overly stringent capital requirements (G28) | Restricted credit availability (E51) |
| Capital regulation (G28) | Economic welfare (D69) |