Capital Regulation in a Macroeconomic Model with Three Layers of Default
58 Pages Posted: 23 Jan 2015
There are 3 versions of this paper
Capital Regulation in a Macroeconomic Model with Three Layers of Default
Capital Regulation in a Macroeconomic Model with Three Layers of Default
Date Written: December 2014
Abstract
We develop a dynamic general equilibrium model for the positive and normative analysis of macroprudential policies. Optimizing financial intermediaries allocate their scarce net worth together with funds raised from saving households across two lending activities, mortgage and corporate lending. For all borrowers (households, firms, and banks) external financing takes the form of debt which is subject to default risk. This "3D model" shows the interplay between three interconnected net worth channels that cause financial amplification and the distortions due to deposit insurance. We apply it to the analysis of capital regulation.
Keywords: Default risk, Financial frictions, Macroprudential policy
JEL Classification: E3, E44, G01, G21
Suggested Citation: Suggested Citation
Caterina Mendicino
European Central Bank (ECB) - Directorate General Research ( email )
Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
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