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The role of banking regulation in an economy under credit risk and liquidity shock

Marcos Soares da Silva and Jose Angelo Divino

The North American Journal of Economics and Finance, 2013, vol. 26, issue C, 266-281

Abstract: This paper develops a Dynamic Stochastic General Equilibrium model which includes a financial sector to analyze the effects of liquidity shock and credit risk in the Brazilian economy. Banks use equity capital and deposits from agents to finance investments of the productive sector. The sources of financial frictions are default rate and liquidity shock, due to deposits withdrawn in advance. The banking supervisor injects liquidity in the deposit market. Using data for the Brazilian economy in the period from 1995 to 2009, the structural parameters are estimated by Bayesian methods. Impulse response functions are computed to describe the dynamic effects of exogenous shocks. The major results show that credit risk is pro-cyclical and default risk depends on structural features. The banking regulator is able to set up a policy to promote financial stability and efficiently reduce fluctuations in the output.

Keywords: DSGE; Banking sector; Default risk; Credit risk; Bank supervision (search for similar items in EconPapers)
JEL-codes: E13 E20 G21 G28 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:26:y:2013:i:c:p:266-281

DOI: 10.1016/j.najef.2013.02.005

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