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Title: Bank Leverage Regulation and Macroeconomic Dynamics
Authors: Christensen, Ian
Meh, Césaire
Moran, Kevin
Keywords: Moral hazard
Bank capital
Countercyclical capital requirements
Leverage
Monetary policy
Issue Date: 2011-12
Series/Report no.: Cahiers du CIRPÉE;11-40
Abstract: This paper assesses the merits of countercyclical bank balance sheet regulation for the stabilization of financial and economic cycles and examines its interaction with monetary policy. The framework used is a dynamic stochastic general equilibrium model with banks and bank capital, in which bank capital solves an asymmetric information problem between banks and their creditors. In this economy, the lending decisions of individual banks affect the riskiness of the whole banking sector, though banks do not internalize this impact. Regulation, in the form of a constraint on bank leverage, can mitigate the impact of this externality by inducing banks to alter the intensity of their monitoring efforts. We find that countercyclical bank leverage regulation can have desirable stabilization properties, particularly when financial shocks are an important source of economic fluctuations. However, the appropriate contribution of countercyclical capital requirements to stabilization after a technology shock depends on the size of the externality and on the conduct of the monetary authority.
URI: https://depot.erudit.org/id/003573dd
Appears in Collections:Cahiers de recherche du CIRPÉE

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