Working Paper: NBER ID: w17102
Authors: Quamrul Ashraf; Boris Gershman; Peter Howitt
Abstract: This paper is an exploratory analysis of the role that banks play in supporting the mechanism of exchange. It considers a model economy in which exchange activities are facilitated and coordinated by a self-organizing network of entrepreneurial trading firms. Collectively, these firms play the part of the Walrasian auctioneer, matching buyers with sellers and helping the economy to approximate equilibrium prices that no individual is able to calculate. Banks affect macroeconomic performance in this economy because their lending activities facilitate entry of trading firms and also influence their exit decisions. Both entry and exit have conflicting effects on performance, and we resort to computational analysis to understand how they are resolved. Our analysis sheds new light on the conflict between micro-prudential bank regulation and macroeconomic stability. Specifically, it draws an important distinction between "normal" performance of the economy and "worst-case" scenarios, and shows that micro prudence conflicts with macro stability only in bad times. The analysis also shows that banks provide a "financial stabilizer" that in some respects can more than counteract the more familiar financial accelerator.
Keywords: banks; macroeconomic performance; agent-based modeling; financial stability; microprudential regulation
JEL Codes: C63; E0; E44; G20; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased bank lending (G21) | more firm entries (Y20) |
| cut off financing to failing firms (G32) | increased exits (J63) |
| banks maintaining higher loan-to-value ratios (G21) | improved performance (D29) |
| banks maintaining lower capital adequacy ratios (G21) | improved performance (D29) |
| banks financing replacement firms (G21) | dampening adverse effects of macroeconomic shocks (F41) |