A DSGE Model with Government-owned Banks

Galindo Gil Hamilton () and Montecinos Alexis ()
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Galindo Gil Hamilton: Department of Finance and Economics, Monte Ahuja College of Business, 2564 Cleveland State University , 1860 E 18th St, Cleveland, OH 44114, USA
Montecinos Alexis: Sawyer Business School, 122699 Suffolk University and Universidad Adolfo Ibáñez , Business School 73 Tremont Street, Boston, MA 02108, USA

The B.E. Journal of Macroeconomics, 2024, vol. 24, issue 1, 591-631

Abstract: How relevant are government-owned banks in the economy, especially during recessions? We study the role of government-owned banks in a dynamic stochastic general equilibrium (DSGE) model with heterogeneous financial intermediaries, heterogeneous households, and minimum capital requirement constraints. We show that the capitalization of government-owned banks during recessions smooths the effects of a negative shock and helps the economy recover more quickly. However, these stabilizing effects could be partially offset by banks’ inefficiency in transforming one unit of capital into loans. Therefore, ignoring the heterogeneity between private and government-owned banks may lead to misleading assessments and conclusions regarding the effects of economic policies on the macroeconomic and banking variables. This is particularly important for evaluating the effectiveness of macroprudential policies.

Keywords: government-owned banks; general equilibrium; capitalization; inefficiency (search for similar items in EconPapers)
JEL-codes: G20 G21 G28 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1515/bejm-2023-0099

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