The role of bank capital in the propagation of shocks

Cesaire Meh and Kevin Moran

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 3, 555-576

Abstract: The recent financial turmoil has underlined the importance of analyzing the link between banks' balance sheets and economic activity. We develop a dynamic stochastic general equilibrium model in which bank capital mitigates an agency problem between banks and their creditors. As a result, the capital position of banks affects their ability to attract loanable funds and therefore influences the business cycle through a bank capital channel of transmission. We find that the bank capital channel greatly amplifies and propagates the effects of technology shocks on output, investment and inflation. Moreover, bank capital shocks create sizeable declines in output and investment.

Keywords: Bank; capital; Capital; adequacy; ratio; Financial; frictions; Transmission; mechanism; of; monetary; policy (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (385)

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Related works:
Working Paper: The Role of Bank Capital in the Propagation of Shocks (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:34:y:2010:i:3:p:555-576

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