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Financial (In)stability, Supervision and Liquidity Injections: A Dynamic General Equilibrium Approach

Grégory de Walque (), Olivier Pierrard () and Abdelaziz Rouabah

No 7202, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a dynamic stochastic general equilibrium model with an heterogeneous banking sector. We introduce endogenous default probabilities for both firms and banks, and allow for bank regulation and liquidity injection into the interbank market. Our aim is to understand the interactions between the banking sector and the rest of the economy, as well as the importance of supervisory and monetary authorities to restore financial stability. The model is calibrated against real US data and used for simulations. We show that Basel regulation reduces the steady state but improves the resilience of the economy to shocks, and that moving from Basel I to Basel II is procyclical. We also show that liquidity injections relieve financial instability but have ambiguous effects on output fluctuations.

Keywords: banking sector; central bank; default risk; DSGE; supervision (search for similar items in EconPapers)
JEL-codes: E13 E20 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac, nep-reg and nep-rmg
Date: 2009-03
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Related works:
Journal Article: Financial (In)Stability, Supervision and Liquidity Injections: A Dynamic General Equilibrium Approach (2010) Downloads
Working Paper: Financial (in)stability, supervision and liquidity injections: a dynamic general equilibrium approach (2009) Downloads
Working Paper: Financial (in)stability, supervision and liquidity injections: a dynamic general equilibrium approach (2008) Downloads
Working Paper: Financial (in)stability, supervision and liquidity injections: a dynamic general equilibrium approach (2008) Downloads
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