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Capital regulation and credit fluctuations

Hans Gersbach () and Jean Rochet ()

Journal of Monetary Economics, 2017, vol. 90, issue C, 113-124

Abstract: Credit cycle stabilization can be a rationale for imposing counter-cyclical capital requirements on banks. The model comprises two productive sectors: in one sector, firms can finance investments through a bond market. In the other, firms rely on bank credit. Financial frictions limit banks’ borrowing capacity. Aggregate shocks impact firms’ productivity. From a welfare perspective, banks lend too much in high productivity states and too little in bad states, although financial markets are complete. Imposing a (stricter) capital requirement in good states corrects capital misallocation, increases expected output and social welfare. Even with risk-neutral agents, stabilization of credit cycles is socially beneficial.

Keywords: Credit fluctuations; Macroprudential regulation; Sectoral misallocation of capital (search for similar items in EconPapers)
JEL-codes: G21 G28 D86 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Capital Regulation and Credit Fluctuations (2012) Downloads
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