DSGE Model with Interbank Market Failure - The Role of Macro-prudential Policies

Tobias Schuler and Luisa Corrado

2016 Papers from Job Market Papers

Abstract: This paper analyses the effects of several macro-prudential policy measures on the banking sector and its linkages to the macroeconomy. We employ a dynamic general equilibrium model with sticky prices, in which banks trade excess funds in the interbank lending market. We find that an increase in the liquidity requirement effectively reduces the impact of an interbank shock on output and employment, while an increased capital requirement propagates only through financial variables as inflation and interest rates. We conclude that stricter liquidity measures which limit inside money creation, dampen the severity of a breakdown in interbank lend- ing. Targeting interbank financing directly through liquidity measures along with a moderate capital requirement generates lower welfare losses. We thereby provide a comprehensive rationale in favor of the regulatory measures in Basel III.

JEL-codes: E40 E51 E58 G28 (search for similar items in EconPapers)
Date: 2016-12-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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