EconStor >
Bank of Canada, Ottawa >
Bank of Canada Working Papers >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/53948
  
Title:Capital requirement and financial frictions in banking: Macroeconomic implications PDF Logo
Authors:Dib, Ali
Issue Date:2010
Series/Report no.:Bank of Canada Working Paper 2010,26
Abstract:The author develops a dynamic stochastic general-equilibrium model with an active banking sector, a financial accelerator, and financial frictions in the interbank and bank capital markets. He investigates the importance of banking sector frictions on business cycle fluctuations and assesses the role of a regulatory capital requirement in propagating the effects of shocks in the real economy. Bank capital is introduced to satisfy the regulatory capital requirement, and serves as collateral for borrowing in the interbank market. Financial frictions are introduced by assuming asymmetric information between lenders and borrowers that creates moral hazard and adverse selection problems in the interbank and bank capital markets, respectively. Highly leveraged banks are vulnerable and therefore pay higher costs when raising funds. The author finds that financial frictions in the interbank and bank capital markets amplify and propagate the effects of shocks; however, the capital requirement attenuates the real impacts of aggregate shocks (including financial shocks), reduces macroeconomic volatilities, and stabilizes the economy.
Subjects:Economic models
Business fluctuations and cycles
Financial markets
Financial stability
JEL:E32
E44
G1
Document Type:Working Paper
Appears in Collections:Bank of Canada Working Papers

Files in This Item:
File Description SizeFormat
638551358.pdf381.49 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/53948

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.