Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/53891
Authors: 
Meh, Césaire
Moran, Kevin
Year of Publication: 
2008
Series/Report no.: 
Bank of Canada Working Paper 2008,36
Abstract: 
Recent events in financial markets have underlined the importance of analyzing the link between the financial health of banks and real economic activity. This paper contributes to this analysis by constructing a dynamic general equilibrium model in which the balance sheet of banks affects the propagation of shocks. We use the model to conduct quantitative experiments on the economy's response to technology and monetary policy shocks, as well as to disturbances originating within the banking sector, which we interpret as episodes of distress in financial markets. We show that, following adverse shocks, economies whose banking sectors remain well-capitalized experience smaller reductions in bank lending and less pronounced downturns. Bank capital thus increases an economy's ability to absorb shocks and, in doing so, affects the conduct of monetary policy. The model is also used to shed light on the ongoing debate over bank capital regulation.
Subjects: 
Transmission of monetary policy
Financial institutions
Financial system regulation and policies
Economic models
JEL: 
E44
E52
G21
Document Type: 
Working Paper

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