Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/211265
Authors: 
Davies, Robert H.
Harris, Laurence
Makrelov, Konstantin
Year of Publication: 
2019
Series/Report no.: 
WIDER Working Paper 2019/35
Abstract: 
We employ a micro-founded and stock-and-flow-consistent model to study the impact of a higher leverage ratio on the South African economy. The model provides a rich representation of institutional balance sheets. The relationship between bank capital, risk-taking behaviour, lending spreads, and economic activity is highlighted. The financial accelerator mechanism operates through the balance sheets of all economic institutions. The introduction of a higher leverage ratio is likely to generate negative economic impacts in the short run. The negative gross domestic product effect is greatest if the financial sector reduces leverage by reducing the value of assets. The regulatory shock leads the sector to change its perception of risk, reducing the size of the money multiplier and increasing lending spreads. Higher regulatory requirements also affect the transmission of monetary policy. Effective monetary policy requires understanding how the financial sector is likely to meet new requirements and change its perceptions of risk.
Subjects: 
computable general equilibrium
financial dynamics
leverage ratio
macroprudential
stock-and-flow consistent
South Africa
JEL: 
D53
D58
E44
E47
G18
Persistent Identifier of the first edition: 
ISBN: 
978-92-9256-669-2
Document Type: 
Working Paper

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