Bank Risk, Monetary Transmission, and Macroprudential Policy
CERSS Colloquium | 2021.5.21

Date & Time: 2021. 5. 20 (Thu) 13:00-14:30

Location: Online Meeting (Zoom)

Speaker: IGARASHI Yoske  (Hokkaido University, Faculty of Economics and Business, Associate Prof. )

Participants: 14

Title: Bank Risk, Monetary Transmission, and Macroprudential Policy

This paper investigates the influence of bank default and leverage
constraints in monetary and macroprudential policy prescriptions. For
that purpose, we build a New Keynesian model with banks who channel
funds from households to firms. They face endogenous leverage
constraints à la Gertler and Kiyotaki (2010) and are subject to the
possibility of costly default.
We calibrate our model to the US economy and show that in the
decentralized equilibrium banks borrow more than the socially efficient
level. A macroprudential policy which limits bank leverage reduces the
risk of bank default and improves long-run welfare. In the short run,
"macroprudential-flavored" monetary policy can reduce financial
propagation by financial frictions by affecting bank shadow values while
countercyclical capital requirement is effective in stabilizing asset
prices. Our normative analysis shows that introducing countercyclicality
in bank capital requirement achieves only moderate welfare improvement
when monetary policy has been used to mitigate financial acceleration.
The jointly optimal policies suggest that policymakers should assign
countercyclical macroprudential role to monetary policy, and bank
capital requirement should focus on the level of prudence.

Susumu Ohnuma, Director, Center for Experimental Research in Social Sciences