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Bank Equity and Macroprudential Policy

Keqing Liu ()

No 1503, Discussion Papers from University of Exeter, Department of Economics

Abstract: We investigate a new macroprudential policy in a DSGE model with fi?nancial frictions. As Gertler, Kiyotaki and Queralto (2012), we propose to subsidize bank equities. However, our tax rate is different from their policy. The tax rate in our macroprudential policy is proportional to capital ratio gap while it is proportional to the shadow price of bank deposit in Gertler et al. (2012). Our policy has two advantages: Firstly, because bank?s balance sheet structure is observable target for central bank, our policy is more applicable for practical policy design. Secondly, our policy makes individual banks choose to raise more capital. While it tightens the moral hazard constraint, the policy could raise the future value of investment and it shows the modi?fied policy is welfare dominant.

Keywords: Macroprudential policy; Bank equity; Capital ratio; DSGE model (search for similar items in EconPapers)
JEL-codes: C61 E61 G28 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
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Journal Article: Bank equity and macroprudential policy (2016) Downloads
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