EconPapers    
Economics at your fingertips  
 

Interest rate rules under financial dominance

Vivien Lewis () and Markus Roth ()

No 497594, Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven

Abstract: In our dynamic stochastic general equilibrium model, capital-constrained entrepreneurs finance risky projects by borrowing from banks. Banks make loans using equity and deposits. Because financial contracts are non-state-contingent, bank balance sheets are exposed to entrepreneurial defaults. Macroprudential policy imposes a positive response of the bank capital ratio to lending. Our main result is that the Taylor Principle is violated when this response is too weak. Then macro-prudential policy is ineffective in stabilising debt and monetary policy is subject to ‘financial dominance’. Under a constant bank capital requirement, a strong reaction of the interest rate to inflation destabilises the financial sector.

Date: 2015-05
References: Add references at CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Published in CES - Discussion paper series, DPS15.09 , pages 1-39

Downloads: (external link)
https://lirias.kuleuven.be/retrieve/498855 (application/pdf)

Related works:
Journal Article: Interest rate rules under financial dominance (2018) Downloads
Working Paper: Interest rate rules under financial dominance (2018) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ete:ceswps:497594

Access Statistics for this paper

More papers in Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven
Bibliographic data for series maintained by library EBIB ().

 
Page updated 2020-03-29
Handle: RePEc:ete:ceswps:497594