Banks Endogenous Systemic Risk Taking. David Martinez-Miera Universidad Carlos III. Javier Suarez CEMFI

Size: px
Start display at page:

Download "Banks Endogenous Systemic Risk Taking. David Martinez-Miera Universidad Carlos III. Javier Suarez CEMFI"

Transcription

1 Banks Endogenous Systemic Risk Taking David Martinez-Miera Universidad Carlos III Javier Suarez CEMFI Banking and Regulation: The Next Frontier A RTF-CEPR-JFI Workshop, Basel, January

2 Introduction The recent crisis has evidenced the need to better understand banks contribution to systemic risk One of the dimensions of this multifaceted phenomenon is the exposure to common shocks In this paper, we analyze: The dynamic trade-offs behindbanks voluntary exposure to an infrequent & large common shock (attractive to them due to standard risk-shifting incentives) The extent to which capital requirements (CRs) contribute to reduce the resulting systemic risk & increase social welfare Issues such as the optimal level of CRs, their gradual introduction & cyclical adjustment 2

3 Simple dynamic equilibrium model in which bank capital dynamics is formalized like in other papers in recent literature (limited wealth of bankers who retain earnings and/or suffer losses from prior investments) But the role of bank capital is different Meh-Moran 10: Monitoring incentives alaholmström-tirole 97 Gertler-Kiyotaki 10: Preventing fund diversion alahart-moore 94 Here, it reduces systemic gambling incentives through two channels: Leverage reduction effect (standard) [Van den Heuvel 08 & many micro-banking models] Last bank standing effect (novel as for CRs) [akin to Perotti-Suarez 02] 3

4 Related literature Papers beyond those already mentioned: Ranciere-Tornell-Westermann 08: myopic firms adopt risky growth strategies due to lenders expectation of a systemic bailout when a crisis occurs Brunnermeier-Sannikov 14, He-Krishnamurthy 14: similar capital dynamics but no time-varying systemic risk-taking & no discussion on CRs Risk taking in banking: under deposit insurance: Kareken-Wallace 78 & many more effect of CRs: Hellmman-Murdock-Stiglitz 00, Repullo 04 equilibrium/dynamic considerations: Acharya-Yorulmazer 07-08, Farhi-Tirole 12 4

5 Our modeling of systemic risk taking 1. Firms production technology is subject to failure risk & can be managedintwomodes: non-systemic (x i =0): its failure is purely i.i.d. systemic (x i =1): if a rare shock occurs, all fail at once 2. Firms need bank loans to pay inputs in advance: l i =k i +wn i 3. Lending to systemic firms is socially inefficient, but... Highly levered banks may find it privately profitable Systemic lending is not ex-ante detectable Regulation sets a common capital requirement: e i γl i 4. Bankers competitively allocate their wealth e as capital across banks 5

6 Key variables Capital requirements are satisfied with inside equity Single state variable is bankers aggregate wealth e grows quickly if bank profits are high gets lost if invested systemically and shock realizes Two important endogenous variables v(e) :value of one unit of bankers wealth x(e) :fraction of bankers wealth invested in systemic banks [Banksspecializeassystemicornon-systemic] 6

7 Key insights 1. Systemic risk taking is maximal after several calm periods [bankers reaction to the lower shadow value of their wealth] 2. Higher capital requirements... reinforce the last bank standing effect make bank capital effectively scarcer at all times less credit lower economic activity [GOOD] [BAD] 3. The socially optimal capital requirements are quite high should be gradually introduced should not be lowered after a crisis 7

8 Key equations* Banks fix the terms of their supply of loans to firms taking bankers required value-weighted return as given Bankers allocate their wealth e t across banks taking the returns offered to them by banks as given v t = ψ +(1 ψ)β max{e t (v t+1 R 0t+1 ),E t (v t+1 R 1t+1 )} R jt+1 : gross return on equity under x i = j v t+1 : marginal value of bankers wealth at end of t Indifference requires E t (v t+1 R 0t+1 )=E t (v t+1 R 1t+1 ) (1) we look at a representative bank of each class Law of motion of total bank capital e t e t+1 = φ(1 + r)w t +(1 ψ)[(1 x t )R 0t+1 + x t R 1t+1 ]e t 8

9 Definition of equilibrium* Stationary law of motion for e t [e, e] Tuple (v(e),x(e); k(e),w(e), R 0 (e),r1 0 (e)) describing endogenous variables for each e [e, e] such that {e t } and {v t,x t ; k t,w t,r 0t+1,R 0 1t+1 } are compatible with: 1. Individual optimization 2. Market clearing Indifference condition for x t (0, 1): [(1 ε)v(e 0 t+1 )+εv(e1 t+1 )]R 0t+1 =(1 ε)v(e 0 t+1 )R0 1t+1 self-equilibrating mechanism for x t 9

10 Rest of the talk 1. Baseline parameterization 2. Graphical presentation of key results 3. Quantitative results 4. Applications 5. Conclusions 10

11 Baseline parameterization (1 period = 1 year) T1. Baseline parameter values Patient agents discount rate ρ 0.02 Impatient agents discount factor β 0.96 Total factor productivity A 2 Physical capital elasticity α 0.3 Depreciation rate in successful firms δ 0.05 Depreciation rate in failed firms λ 0.35 Idiosyncratic default rate of non-systemic firms π Idiosyncratic default rate of systemic firms π Probability of a systemic shock ε 0.03 Bankers exit rate ψ 0.20 Fraction of wage income earned by bankers φ 0.05 [Parsimonious model: 11 parameters only] 11

12 Why these values? Low real interest rates such as prior to the recent crisis A =2is inconsequential (levels in 0 to 100 range) α =0.30 produces labor share ' 70% δ and λ match K/Y ' 3-4 & LGD' 45% π 0,π 1, and ε sufficient room of risk shifting [expected default rates 3% 4.7%; systemic shocks every 33y] Bank capital dynamics (highly tentative): ψ: bankers expected active life = 5y φ: capital brought in by active bankers = 5% of agg. labor income 12

13 Social welfare W as a function of γ Social welfare % 8% 10% 12% 14% 16% 18% Capital requirement Figure 1: W (γ) [we compare γ =14% with γ=7%] 13

14 v(e) and x(e) under low and optimal γ Marginal value of bank capital (v) optimal capital requirement (14%) low capital requirement (7%) Systemic risk taking (x) optimal capital requirement (14%) low capital requirement (7%) Aggregate amount of bank capital (e) Figure 2a: v(e) Aggregate amount of bank capital (e) Figure 2b: x(e) 14

15 Equilibrium dynamics with low and optimal γ 3 Equilibrium dynamics (CR=7%) 3 Equilibrium dynamics (CR=14%) Aggregate bank capital at t Dynamics if no shock realizes Dynamics if shock realizes 45-degree line Aggregate bank capital at t Dynamics if no shock realizes Dynamics if shock realizes 45-degree line Aggregate bank capital at t Aggregate bank capital at t Figure 3a (γ =7%) Figure 3b (γ =14%) 15

16 Equilibrium dynamics with low and optimal γ Frequency Ergodic distribution (CR=7%) Aggregate bank capital Frequency Ergodic distribution (CR=14%) Aggregate bank capital Figure 3c (γ =7%) Figure 3d (γ =14%) 16

17 Quantitative results Optimal capital requirements: positive and large (14%) Comparison CR=7% CR=14% (unconditional means) Lower fraction of systemic loans: 71% 25% Higher loan rates: 4.1% 5.6% Lower macro aggregates: bank credit ( 21%), GDP ( 8.5%) Higher social welfare: ' +0.9% permanent consumption Variation in year-after-shock aggregates: CR=7%: loan rate (+11.8pp), bank credit (-66%), GDP (-34%) CR=14%: loan rate (+2.6pp), bank credit (-24%), GDP (-10%) 17

18 Quantitative results (details, 1/3) T2. Main unconditional means γ =7% γ =14% % Welfare (equivalent consumption flow) GDP Bank credit (l) Bank equity (e) Loan rate (r L ) (in %) pp Deposit insurance costs Value of one unit of bank capital (v) Fraction of equity in systemic banks (x)

19 Quantitative results (details, 2/3) T3. % Change in after-shock period (from PSS) γ=7% γ=14% Aggregate net consumption GDP Bank credit (l) Loan rate (r L ) 11.8pp 2.6pp Value of one unit of bank capital (v) Fraction of equity in systemic banks (x)

20 Quantitative results (details, 3/3) T4. Other macro & financial ratios γ =7% γ =14% Labor income/gdp Physical capital/gdp Bank credit/gdp* Deposit insurance costs/gdp (%) ROE at non-systemic banks (%) ROE at systemic banks if no shock realizes (%) [*: suggests exuberance due to lax regulation] 20

21 Applications Transitional dynamics from moving γ and impact on welfare: There is value (and limits to the value) of applying gradualism in rising γ [Best: moving from 7% to 13% in 9 years] Assessment of countercyclical capital requirements They have a bad effect on incentives Overall, there is no net gain from making them countercyclical But sticking to flat requirements may not be time-consistent 21

22 % 14% % 12% Social welfare % 9% 10% 8% Years of transition (T) 22

23 Conclusions Dynamic equilibrium model of banks endogenous systemic risktaking Allows us to assess the macroprudential role of capital requirements using an internally consistent welfare metrics: They reduce credit and output in calm times but also systemic risk taking interior socially optimal level The identified last bank standing effect implies that systemic risk taking increases as the economy expands... Yet, systemic risk taking increases if the CRs are cyclically adjusted 23

A Macroeconomic Model of Endogenous Systemic Risk Taking. David Martinez-Miera Universidad Carlos III. Javier Suarez CEMFI

A Macroeconomic Model of Endogenous Systemic Risk Taking. David Martinez-Miera Universidad Carlos III. Javier Suarez CEMFI A Macroeconomic Model of Endogenous Systemic Risk Taking David Martinez-Miera Universidad Carlos III Javier Suarez CEMFI 2nd MaRs Conference, ECB, 30-31 October 2012 1 Introduction The recent crisis has

More information

The Socially Optimal Level of Capital Requirements: AViewfromTwoPapers. Javier Suarez* CEMFI. Federal Reserve Bank of Chicago, November 2012

The Socially Optimal Level of Capital Requirements: AViewfromTwoPapers. Javier Suarez* CEMFI. Federal Reserve Bank of Chicago, November 2012 The Socially Optimal Level of Capital Requirements: AViewfromTwoPapers Javier Suarez* CEMFI Federal Reserve Bank of Chicago, 15 16 November 2012 *Based on joint work with David Martinez-Miera (Carlos III)

More information

Banks Endogenous Systemic Risk Taking

Banks Endogenous Systemic Risk Taking Banks Endogenous Systemic Risk Taking David Martinez-Miera Universidad Carlos III Javier Suarez CEMFI and CEPR September 2014 Abstract We develop a dynamic general equilibrium model that features endogenous

More information

Bank Capital, Agency Costs, and Monetary Policy. Césaire Meh Kevin Moran Department of Monetary and Financial Analysis Bank of Canada

Bank Capital, Agency Costs, and Monetary Policy. Césaire Meh Kevin Moran Department of Monetary and Financial Analysis Bank of Canada Bank Capital, Agency Costs, and Monetary Policy Césaire Meh Kevin Moran Department of Monetary and Financial Analysis Bank of Canada Motivation A large literature quantitatively studies the role of financial

More information

AMacroeconomicModelof Endogenous Systemic Risk Taking

AMacroeconomicModelof Endogenous Systemic Risk Taking AMacroeconomicModelof Endogenous Systemic Risk Taking David Martinez-Miera Universidad Carlos III Javier Suarez CEMFI and CEPR September 2012 Abstract We analyze banks systemic risk taking in a simple

More information

A Macroeconomic Framework for Quantifying Systemic Risk

A Macroeconomic Framework for Quantifying Systemic Risk A Macroeconomic Framework for Quantifying Systemic Risk Zhiguo He, University of Chicago and NBER Arvind Krishnamurthy, Northwestern University and NBER December 2013 He and Krishnamurthy (Chicago, Northwestern)

More information

A Macroeconomic Model with Financial Panics

A Macroeconomic Model with Financial Panics A Macroeconomic Model with Financial Panics Mark Gertler, Nobuhiro Kiyotaki, Andrea Prestipino NYU, Princeton, Federal Reserve Board 1 March 218 1 The views expressed in this paper are those of the authors

More information

Markets, Banks and Shadow Banks

Markets, Banks and Shadow Banks Markets, Banks and Shadow Banks David Martinez-Miera Rafael Repullo U. Carlos III, Madrid, Spain CEMFI, Madrid, Spain AEA Session Macroprudential Policy and Banking Panics Philadelphia, January 6, 2018

More information

Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model

Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model Juliane Begenau Harvard Business School July 11, 2015 1 Motivation How to regulate banks? Capital requirement: min equity/

More information

Overborrowing, Financial Crises and Macro-prudential Policy. Macro Financial Modelling Meeting, Chicago May 2-3, 2013

Overborrowing, Financial Crises and Macro-prudential Policy. Macro Financial Modelling Meeting, Chicago May 2-3, 2013 Overborrowing, Financial Crises and Macro-prudential Policy Javier Bianchi University of Wisconsin & NBER Enrique G. Mendoza Universtiy of Pennsylvania & NBER Macro Financial Modelling Meeting, Chicago

More information

A Macroeconomic Framework for Quantifying Systemic Risk

A Macroeconomic Framework for Quantifying Systemic Risk A Macroeconomic Framework for Quantifying Systemic Risk Zhiguo He, University of Chicago and NBER Arvind Krishnamurthy, Stanford University and NBER Bank of Canada, August 2017 He and Krishnamurthy (Chicago,

More information

A Macroeconomic Model with Financially Constrained Producers and Intermediaries

A Macroeconomic Model with Financially Constrained Producers and Intermediaries A Macroeconomic Model with Financially Constrained Producers and Intermediaries Authors: Vadim, Elenev Tim Landvoigt and Stijn Van Nieuwerburgh Discussion by: David Martinez-Miera ECB Research Workshop

More information

AMacroeconomicModelof Endogenous Systemic Risk Taking

AMacroeconomicModelof Endogenous Systemic Risk Taking AMacroeconomicModelof Endogenous Systemic Risk Taking David Martinez-Miera Universidad Carlos III Javier Suarez CEMFI and CEPR December 2013 Abstract We analyze banks systemic risk-taking decisions in

More information

Reforms in a Debt Overhang

Reforms in a Debt Overhang Structural Javier Andrés, Óscar Arce and Carlos Thomas 3 National Bank of Belgium, June 8 4 Universidad de Valencia, Banco de España Banco de España 3 Banco de España National Bank of Belgium, June 8 4

More information

Financial Amplification, Regulation and Long-term Lending

Financial Amplification, Regulation and Long-term Lending Financial Amplification, Regulation and Long-term Lending Michael Reiter 1 Leopold Zessner 2 1 Instiute for Advances Studies, Vienna 2 Vienna Graduate School of Economics Barcelona GSE Summer Forum ADEMU,

More information

Credit Booms, Financial Crises and Macroprudential Policy

Credit Booms, Financial Crises and Macroprudential Policy Credit Booms, Financial Crises and Macroprudential Policy Mark Gertler, Nobuhiro Kiyotaki, Andrea Prestipino NYU, Princeton, Federal Reserve Board 1 March 219 1 The views expressed in this paper are those

More information

Macroprudential Bank Capital Regulation in a Competitive Financial System

Macroprudential Bank Capital Regulation in a Competitive Financial System Macroprudential Bank Capital Regulation in a Competitive Financial System Milton Harris, Christian Opp, Marcus Opp Chicago, UPenn, University of California Fall 2015 H 2 O (Chicago, UPenn, UC) Macroprudential

More information

The Procyclical Effects of Basel II

The Procyclical Effects of Basel II 9TH JACQUES POLAK ANNUAL RESEARCH CONFERENCE NOVEMBER 13-14, 2008 The Procyclical Effects of Basel II Rafael Repullo CEMFI and CEPR, Madrid, Spain and Javier Suarez CEMFI and CEPR, Madrid, Spain Presented

More information

A Macroeconomic Model with Financial Panics

A Macroeconomic Model with Financial Panics A Macroeconomic Model with Financial Panics Mark Gertler, Nobuhiro Kiyotaki, Andrea Prestipino NYU, Princeton, Federal Reserve Board 1 September 218 1 The views expressed in this paper are those of the

More information

The Role of the Net Worth of Banks in the Propagation of Shocks

The Role of the Net Worth of Banks in the Propagation of Shocks The Role of the Net Worth of Banks in the Propagation of Shocks Preliminary Césaire Meh Department of Monetary and Financial Analysis Bank of Canada Kevin Moran Université Laval The Role of the Net Worth

More information

A Policy Model for Analyzing Macroprudential and Monetary Policies

A Policy Model for Analyzing Macroprudential and Monetary Policies A Policy Model for Analyzing Macroprudential and Monetary Policies Sami Alpanda Gino Cateau Cesaire Meh Bank of Canada November 2013 Alpanda, Cateau, Meh (Bank of Canada) ()Macroprudential - Monetary Policy

More information

Aggregate Bank Capital and Credit Dynamics

Aggregate Bank Capital and Credit Dynamics Aggregate Bank Capital and Credit Dynamics N. Klimenko S. Pfeil J.-C. Rochet G. De Nicolò (Zürich) (Bonn) (Zürich, SFI and TSE) (IMF and CESifo) March 2016 The views expressed in this paper are those of

More information

Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach

Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach Gianluca Benigno 1 Andrew Foerster 2 Christopher Otrok 3 Alessandro Rebucci 4 1 London School of Economics and

More information

Bank Capital Buffers in a Dynamic Model 1

Bank Capital Buffers in a Dynamic Model 1 Bank Capital Buffers in a Dynamic Model 1 Jochen Mankart 1 Alex Michaelides 2 Spyros Pagratis 3 1 Deutsche Bundesbank 2 Imperial College London 3 Athens University of Economics and Business CRESSE 216,

More information

Shadow Banking and Regulation: A Quantitative Assessment

Shadow Banking and Regulation: A Quantitative Assessment Shadow Banking and Regulation: A Quantitative Assessment Césaire A. Meh Kevin Moran Bank of Canada Université Laval Journées du CIRPÉE 2013, Lac Beauport 26 septembre 2013 The views expressed are those

More information

Equity versus Bail-in Debt in Banking: An Agency Perspective. Javier Suarez (CEMFI) Workshop on Financial Stability CEMFI, Madrid, 13 May 2016

Equity versus Bail-in Debt in Banking: An Agency Perspective. Javier Suarez (CEMFI) Workshop on Financial Stability CEMFI, Madrid, 13 May 2016 Equity versus Bail-in Debt in Banking: An Agency Perspective Caterina Mendicino (ECB) Kalin Nikolov (ECB) Javier Suarez (CEMFI) Workshop on Financial Stability CEMFI, Madrid, 13 May 2016 1 Introduction

More information

A Macroeconomic Framework for Quantifying Systemic Risk

A Macroeconomic Framework for Quantifying Systemic Risk A Macroeconomic Framework for Quantifying Systemic Risk Zhiguo He, University of Chicago and NBER Arvind Krishnamurthy, Northwestern University and NBER May 2013 He and Krishnamurthy (Chicago, Northwestern)

More information

Taxing Firms Facing Financial Frictions

Taxing Firms Facing Financial Frictions Taxing Firms Facing Financial Frictions Daniel Wills 1 Gustavo Camilo 2 1 Universidad de los Andes 2 Cornerstone November 11, 2017 NTA 2017 Conference Corporate income is often taxed at different sources

More information

Foreign Competition and Banking Industry Dynamics: An Application to Mexico

Foreign Competition and Banking Industry Dynamics: An Application to Mexico Foreign Competition and Banking Industry Dynamics: An Application to Mexico Dean Corbae Pablo D Erasmo 1 Univ. of Wisconsin FRB Philadelphia June 12, 2014 1 The views expressed here do not necessarily

More information

A Macroeconomic Framework for Quantifying Systemic Risk

A Macroeconomic Framework for Quantifying Systemic Risk A Macroeconomic Framework for Quantifying Systemic Risk Zhiguo He, University of Chicago and NBER Arvind Krishnamurthy, Stanford University and NBER March 215 He and Krishnamurthy (Chicago, Stanford) Systemic

More information

Financial Intermediation and the Supply of Liquidity

Financial Intermediation and the Supply of Liquidity Financial Intermediation and the Supply of Liquidity Jonathan Kreamer University of Maryland, College Park November 11, 2012 1 / 27 Question Growing recognition of the importance of the financial sector.

More information

Bank Regulation under Fire Sale Externalities

Bank Regulation under Fire Sale Externalities Bank Regulation under Fire Sale Externalities Gazi Ishak Kara 1 S. Mehmet Ozsoy 2 1 Office of Financial Stability Policy and Research, Federal Reserve Board 2 Ozyegin University May 17, 2016 Disclaimer:

More information

Aggregate Bank Capital and Credit Dynamics

Aggregate Bank Capital and Credit Dynamics Aggregate Bank Capital and Credit Dynamics N. Klimenko S. Pfeil J.-C. Rochet G. De Nicolò (Zürich) (Bonn) (Zürich, SFI and TSE) (IMF and CESifo) MFM Winter 2016 Meeting The views expressed in this paper

More information

Bank Capital Requirements: A Quantitative Analysis

Bank Capital Requirements: A Quantitative Analysis Bank Capital Requirements: A Quantitative Analysis Thiên T. Nguyễn Introduction Motivation Motivation Key regulatory reform: Bank capital requirements 1 Introduction Motivation Motivation Key regulatory

More information

Optimal Credit Market Policy. CEF 2018, Milan

Optimal Credit Market Policy. CEF 2018, Milan Optimal Credit Market Policy Matteo Iacoviello 1 Ricardo Nunes 2 Andrea Prestipino 1 1 Federal Reserve Board 2 University of Surrey CEF 218, Milan June 2, 218 Disclaimer: The views expressed are solely

More information

Achieving Actuarial Balance in Social Security: Measuring the Welfare Effects on Individuals

Achieving Actuarial Balance in Social Security: Measuring the Welfare Effects on Individuals Achieving Actuarial Balance in Social Security: Measuring the Welfare Effects on Individuals Selahattin İmrohoroğlu 1 Shinichi Nishiyama 2 1 University of Southern California (selo@marshall.usc.edu) 2

More information

Household Debt, Financial Intermediation, and Monetary Policy

Household Debt, Financial Intermediation, and Monetary Policy Household Debt, Financial Intermediation, and Monetary Policy Shutao Cao 1 Yahong Zhang 2 1 Bank of Canada 2 Western University October 21, 2014 Motivation The US experience suggests that the collapse

More information

Coordinating Monetary and Financial Regulatory Policies

Coordinating Monetary and Financial Regulatory Policies Coordinating Monetary and Financial Regulatory Policies Alejandro Van der Ghote European Central Bank May 2018 The views expressed on this discussion are my own and do not necessarily re ect those of the

More information

Overborrowing, Financial Crises and Macro-prudential Policy

Overborrowing, Financial Crises and Macro-prudential Policy Overborrowing, Financial Crises and Macro-prudential Policy Javier Bianchi University of Wisconsin Enrique G. Mendoza University of Maryland & NBER The case for macro-prudential policies Credit booms are

More information

Discussion by J.C.Rochet (SFI,UZH and TSE) Prepared for the Swissquote Conference 2012 on Liquidity and Systemic Risk

Discussion by J.C.Rochet (SFI,UZH and TSE) Prepared for the Swissquote Conference 2012 on Liquidity and Systemic Risk Discussion by J.C.Rochet (SFI,UZH and TSE) Prepared for the Swissquote Conference 2012 on Liquidity and Systemic Risk 1 Objectives of the paper Develop a theoretical model of bank lending that allows to

More information

Bank Capital Buffers in a Dynamic Model 1

Bank Capital Buffers in a Dynamic Model 1 Bank Capital Buffers in a Dynamic Model 1 Jochen Mankart 1 Alex Michaelides 2 Spyros Pagratis 3 1 Deutsche Bundesbank 2 Imperial College London 3 Athens University of Economics and Business November 217

More information

What is Cyclical in Credit Cycles?

What is Cyclical in Credit Cycles? What is Cyclical in Credit Cycles? Rui Cui May 31, 2014 Introduction Credit cycles are growth cycles Cyclicality in the amount of new credit Explanations: collateral constraints, equity constraints, leverage

More information

International Banks and the Cross-Border Transmission of Business Cycles 1

International Banks and the Cross-Border Transmission of Business Cycles 1 International Banks and the Cross-Border Transmission of Business Cycles 1 Ricardo Correa Horacio Sapriza Andrei Zlate Federal Reserve Board Global Systemic Risk Conference November 17, 2011 1 These slides

More information

Discussion of Procyclicality of Capital Requirements in a General Equilibrium Model of Liquidity Dependence

Discussion of Procyclicality of Capital Requirements in a General Equilibrium Model of Liquidity Dependence Discussion of Procyclicality of Capital Requirements in a General Equilibrium Model of Liquidity Dependence Javier Suarez CEMFI and CEPR 1. Introduction The paper that motivates this discussion belongs

More information

Financial intermediaries in an estimated DSGE model for the UK

Financial intermediaries in an estimated DSGE model for the UK Financial intermediaries in an estimated DSGE model for the UK Stefania Villa a Jing Yang b a Birkbeck College b Bank of England Cambridge Conference - New Instruments of Monetary Policy: The Challenges

More information

Structural Reforms in a Debt Overhang

Structural Reforms in a Debt Overhang in a Debt Overhang Javier Andrés, Óscar Arce and Carlos Thomas 3 9/5/5 - Birkbeck Center for Applied Macroeconomics Universidad de Valencia, Banco de España Banco de España 3 Banco de España 9/5/5 - Birkbeck

More information

Macroprudential Policies in a Low Interest-Rate Environment

Macroprudential Policies in a Low Interest-Rate Environment Macroprudential Policies in a Low Interest-Rate Environment Margarita Rubio 1 Fang Yao 2 1 University of Nottingham 2 Reserve Bank of New Zealand. The views expressed in this paper do not necessarily reflect

More information

Concerted Efforts? Monetary Policy and Macro-Prudential Tools

Concerted Efforts? Monetary Policy and Macro-Prudential Tools Concerted Efforts? Monetary Policy and Macro-Prudential Tools Andrea Ferrero Richard Harrison Benjamin Nelson University of Oxford Bank of England Rokos Capital 20 th Central Bank Macroeconomic Modeling

More information

Risky Mortgages in a DSGE Model

Risky Mortgages in a DSGE Model 1 / 29 Risky Mortgages in a DSGE Model Chiara Forlati 1 Luisa Lambertini 1 1 École Polytechnique Fédérale de Lausanne CMSG November 6, 21 2 / 29 Motivation The global financial crisis started with an increase

More information

A Macroeconomic Framework for Quantifying Systemic Risk. June 2012

A Macroeconomic Framework for Quantifying Systemic Risk. June 2012 A Macroeconomic Framework for Quantifying Systemic Risk Zhiguo He Arvind Krishnamurthy University of Chicago & NBER Northwestern University & NBER June 212 Systemic Risk Systemic risk: risk (probability)

More information

External Financing and the Role of Financial Frictions over the Business Cycle: Measurement and Theory. November 7, 2014

External Financing and the Role of Financial Frictions over the Business Cycle: Measurement and Theory. November 7, 2014 External Financing and the Role of Financial Frictions over the Business Cycle: Measurement and Theory Ali Shourideh Wharton Ariel Zetlin-Jones CMU - Tepper November 7, 2014 Introduction Question: How

More information

Inflation, Nominal Debt, Housing, and Welfare

Inflation, Nominal Debt, Housing, and Welfare Inflation, Nominal Debt, Housing, and Welfare Shutao Cao Bank of Canada Césaire A. Meh Bank of Canada José Víctor Ríos-Rull University of Minnesota and Federal Reserve Bank of Minneapolis Yaz Terajima

More information

Multi-Dimensional Monetary Policy

Multi-Dimensional Monetary Policy Multi-Dimensional Monetary Policy Michael Woodford Columbia University John Kuszczak Memorial Lecture Bank of Canada Annual Research Conference November 3, 2016 Michael Woodford (Columbia) Multi-Dimensional

More information

A Model of Financial Intermediation

A Model of Financial Intermediation A Model of Financial Intermediation Jesús Fernández-Villaverde University of Pennsylvania December 25, 2012 Jesús Fernández-Villaverde (PENN) A Model of Financial Intermediation December 25, 2012 1 / 43

More information

Asset Prices, Collateral and Unconventional Monetary Policy in a DSGE model

Asset Prices, Collateral and Unconventional Monetary Policy in a DSGE model Asset Prices, Collateral and Unconventional Monetary Policy in a DSGE model Bundesbank and Goethe-University Frankfurt Department of Money and Macroeconomics January 24th, 212 Bank of England Motivation

More information

Booms and Banking Crises

Booms and Banking Crises Booms and Banking Crises F. Boissay, F. Collard and F. Smets Macro Financial Modeling Conference Boston, 12 October 2013 MFM October 2013 Conference 1 / Disclaimer The views expressed in this presentation

More information

Efficient Bailouts? Javier Bianchi. Wisconsin & NYU

Efficient Bailouts? Javier Bianchi. Wisconsin & NYU Efficient Bailouts? Javier Bianchi Wisconsin & NYU Motivation Large interventions in credit markets during financial crises Fierce debate about desirability of bailouts Supporters: salvation from a deeper

More information

Money and Capital in a persistent Liquidity Trap

Money and Capital in a persistent Liquidity Trap Money and Capital in a persistent Liquidity Trap Philippe Bacchetta 12 Kenza Benhima 1 Yannick Kalantzis 3 1 University of Lausanne 2 CEPR 3 Banque de France Investment in the new monetary and financial

More information

The I Theory of Money

The I Theory of Money The I Theory of Money Markus Brunnermeier and Yuliy Sannikov Presented by Felipe Bastos G Silva 09/12/2017 Overview Motivation: A theory of money needs a place for financial intermediaries (inside money

More information

Keynesian Views On The Fiscal Multiplier

Keynesian Views On The Fiscal Multiplier Faculty of Social Sciences Jeppe Druedahl (Ph.d. Student) Department of Economics 16th of December 2013 Slide 1/29 Outline 1 2 3 4 5 16th of December 2013 Slide 2/29 The For Today 1 Some 2 A Benchmark

More information

Quantitative Significance of Collateral Constraints as an Amplification Mechanism

Quantitative Significance of Collateral Constraints as an Amplification Mechanism RIETI Discussion Paper Series 09-E-05 Quantitative Significance of Collateral Constraints as an Amplification Mechanism INABA Masaru The Canon Institute for Global Studies KOBAYASHI Keiichiro RIETI The

More information

Macroeconomics of Bank Capital and Liquidity Regulations

Macroeconomics of Bank Capital and Liquidity Regulations Macroeconomics of Bank Capital and Liquidity Regulations Authors: Frederic Boissay and Fabrice Collard Discussion by: David Martinez-Miera UC3M & CEPR Financial Stability Conference Martinez-Miera (UC3M

More information

EXAMINING MACROECONOMIC MODELS

EXAMINING MACROECONOMIC MODELS 1 / 24 EXAMINING MACROECONOMIC MODELS WITH FINANCE CONSTRAINTS THROUGH THE LENS OF ASSET PRICING Lars Peter Hansen Benheim Lectures, Princeton University EXAMINING MACROECONOMIC MODELS WITH FINANCING CONSTRAINTS

More information

Public Investment, Debt, and Welfare: A Quantitative Analysis

Public Investment, Debt, and Welfare: A Quantitative Analysis Public Investment, Debt, and Welfare: A Quantitative Analysis Santanu Chatterjee University of Georgia Felix Rioja Georgia State University October 31, 2017 John Gibson Georgia State University Abstract

More information

Macroprudential Policies and the Lucas Critique 1

Macroprudential Policies and the Lucas Critique 1 Macroprudential Policies and the Lucas Critique 1 Bálint Horváth 2 and Wolf Wagner 3 The experience of recent years has reinforced the view that the financial system tends to amplify shocks over the cycle,

More information

A Pigovian Approach to Liquidity Regulation

A Pigovian Approach to Liquidity Regulation 12TH JACQUES POLAK ANNUAL RESEARCH CONFERENCE NOVEMBER 10 11, 2011 A Pigovian Approach to Liquidity Regulation Enrico C. Perotti University of Amsterdam Javier Suarez CEMFI Presentation presented at the

More information

The I Theory of Money

The I Theory of Money The I Theory of Money Markus K. Brunnermeier & Yuliy Sannikov Princeton University CSEF-IGIER Symposium Capri, June 24 th, 2015 Motivation Framework to study monetary and financial stability Interaction

More information

Convergence of Life Expectancy and Living Standards in the World

Convergence of Life Expectancy and Living Standards in the World Convergence of Life Expectancy and Living Standards in the World Kenichi Ueda* *The University of Tokyo PRI-ADBI Joint Workshop January 13, 2017 The views are those of the author and should not be attributed

More information

Optimal Time-Consistent Macroprudential Policy

Optimal Time-Consistent Macroprudential Policy Optimal Time-Consistent Macroprudential Policy Javier Bianchi Minneapolis Fed & NBER Enrique G. Mendoza Univ. of Pennsylvania, NBER & PIER Why study macroprudential policy? MPP has gained relevance as

More information

Capital Income Tax Reform and the Japanese Economy (Very Preliminary and Incomplete)

Capital Income Tax Reform and the Japanese Economy (Very Preliminary and Incomplete) Capital Income Tax Reform and the Japanese Economy (Very Preliminary and Incomplete) Gary Hansen (UCLA), Selo İmrohoroğlu (USC), Nao Sudo (BoJ) December 22, 2015 Keio University December 22, 2015 Keio

More information

Risk-Adjusted Capital Allocation and Misallocation

Risk-Adjusted Capital Allocation and Misallocation Risk-Adjusted Capital Allocation and Misallocation Joel M. David Lukas Schmid David Zeke USC Duke & CEPR USC Summer 2018 1 / 18 Introduction In an ideal world, all capital should be deployed to its most

More information

The lender of last resort: liquidity provision versus the possibility of bail-out

The lender of last resort: liquidity provision versus the possibility of bail-out The lender of last resort: liquidity provision versus the possibility of bail-out Rob Nijskens Sylvester C.W. Eijffinger June 24, 2010 The lender of last resort: liquidity versus bail-out 1 /20 Motivation:

More information

The Transmission of Monetary Policy through Redistributions and Durable Purchases

The Transmission of Monetary Policy through Redistributions and Durable Purchases The Transmission of Monetary Policy through Redistributions and Durable Purchases Vincent Sterk and Silvana Tenreyro UCL, LSE September 2015 Sterk and Tenreyro (UCL, LSE) OMO September 2015 1 / 28 The

More information

Household income risk, nominal frictions, and incomplete markets 1

Household income risk, nominal frictions, and incomplete markets 1 Household income risk, nominal frictions, and incomplete markets 1 2013 North American Summer Meeting Ralph Lütticke 13.06.2013 1 Joint-work with Christian Bayer, Lien Pham, and Volker Tjaden 1 / 30 Research

More information

Liquidity Regulation and Credit Booms: Theory and Evidence from China. JRCPPF Sixth Annual Conference February 16-17, 2017

Liquidity Regulation and Credit Booms: Theory and Evidence from China. JRCPPF Sixth Annual Conference February 16-17, 2017 Liquidity Regulation and Credit Booms: Theory and Evidence from China Kinda Hachem Chicago Booth and NBER Zheng Michael Song Chinese University of Hong Kong JRCPPF Sixth Annual Conference February 16-17,

More information

Debt Covenants and the Macroeconomy: The Interest Coverage Channel

Debt Covenants and the Macroeconomy: The Interest Coverage Channel Debt Covenants and the Macroeconomy: The Interest Coverage Channel Daniel L. Greenwald MIT Sloan EFA Lunch, April 19 Daniel L. Greenwald Debt Covenants and the Macroeconomy EFA Lunch, April 19 1 / 6 Introduction

More information

. Social Security Actuarial Balance in General Equilibrium. S. İmrohoroğlu (USC) and S. Nishiyama (CBO)

. Social Security Actuarial Balance in General Equilibrium. S. İmrohoroğlu (USC) and S. Nishiyama (CBO) ....... Social Security Actuarial Balance in General Equilibrium S. İmrohoroğlu (USC) and S. Nishiyama (CBO) Rapid Aging and Chinese Pension Reform, June 3, 2014 SHUFE, Shanghai ..... The results in this

More information

Discussion of: The Fiscal Multiplier

Discussion of: The Fiscal Multiplier Discussion of: The Fiscal Multiplier Hagedorn M., I. Manovskii, K. Mitman Tommaso Monacelli - Università Bocconi, IGIER and CEPR CEPR-ECB, 13-14 December 2016. General questions 1. What are the aggregate

More information

On the Design of an European Unemployment Insurance Mechanism

On the Design of an European Unemployment Insurance Mechanism On the Design of an European Unemployment Insurance Mechanism Árpád Ábrahám João Brogueira de Sousa Ramon Marimon Lukas Mayr European University Institute and Barcelona GSE - UPF, CEPR & NBER ADEMU Galatina

More information

Atkeson, Chari and Kehoe (1999), Taxing Capital Income: A Bad Idea, QR Fed Mpls

Atkeson, Chari and Kehoe (1999), Taxing Capital Income: A Bad Idea, QR Fed Mpls Lucas (1990), Supply Side Economics: an Analytical Review, Oxford Economic Papers When I left graduate school, in 1963, I believed that the single most desirable change in the U.S. structure would be the

More information

Gender Gaps and the Rise of the Service Economy

Gender Gaps and the Rise of the Service Economy Gender Gaps and the Rise of the Service Economy L. Rachel Ngai & Barbara Petrongolo American Economic Journal: Macroeconomics 2017 Presented by Francisco Javier Rodríguez for the Macro Reading Group Universidad

More information

A Model with Costly Enforcement

A Model with Costly Enforcement A Model with Costly Enforcement Jesús Fernández-Villaverde University of Pennsylvania December 25, 2012 Jesús Fernández-Villaverde (PENN) Costly-Enforcement December 25, 2012 1 / 43 A Model with Costly

More information

Liquidity Policies and Systemic Risk Tobias Adrian and Nina Boyarchenko

Liquidity Policies and Systemic Risk Tobias Adrian and Nina Boyarchenko Policies and Systemic Risk Tobias Adrian and Nina Boyarchenko The views presented here are the authors and are not representative of the views of the Federal Reserve Bank of New York or of the Federal

More information

Business Cycles and Household Formation: The Micro versus the Macro Labor Elasticity

Business Cycles and Household Formation: The Micro versus the Macro Labor Elasticity Business Cycles and Household Formation: The Micro versus the Macro Labor Elasticity Greg Kaplan José-Víctor Ríos-Rull University of Pennsylvania University of Minnesota, Mpls Fed, and CAERP EFACR Consumption

More information

Monetary policy and the asset risk-taking channel

Monetary policy and the asset risk-taking channel Monetary policy and the asset risk-taking channel Angela Abbate 1 Dominik Thaler 2 1 Deutsche Bundesbank and European University Institute 2 European University Institute Trinity Workshop, 7 November 215

More information

A Macroeconomic Framework for Quantifying Systemic Risk

A Macroeconomic Framework for Quantifying Systemic Risk A Macroeconomic Framework for Quantifying Systemic Risk Zhiguo He, University of Chicago and NBER Arvind Krishnamurthy, Northwestern University and NBER November 2012 He and Krishnamurthy (Chicago, Northwestern)

More information

Liquidity Regulation and Unintended Financial Transformation in China

Liquidity Regulation and Unintended Financial Transformation in China Liquidity Regulation and Unintended Financial Transformation in China Kinda Cheryl Hachem Zheng (Michael) Song Chicago Booth Chinese University of Hong Kong First Research Workshop on China s Economy April

More information

Bank Runs, Prudential Tools and Social Welfare in a Global Game General Equilibrium Model

Bank Runs, Prudential Tools and Social Welfare in a Global Game General Equilibrium Model Bank Runs, Prudential Tools and Social Welfare in a Global Game General Equilibrium Model Daisuke Ikeda Bank of England 10 April 2018 Financial crises: predictability, causes and consequences The views

More information

Optimal Monetary Policy Rules and House Prices: The Role of Financial Frictions

Optimal Monetary Policy Rules and House Prices: The Role of Financial Frictions Optimal Monetary Policy Rules and House Prices: The Role of Financial Frictions A. Notarpietro S. Siviero Banca d Italia 1 Housing, Stability and the Macroeconomy: International Perspectives Dallas Fed

More information

Uncertainty, Liquidity and Financial Cycles

Uncertainty, Liquidity and Financial Cycles Uncertainty, Liquidity and Financial Cycles Ge Zhou Zhejiang University Jan 2019, ASSA Ge Zhou (Zhejiang University) Uncertainty, Liquidity and Financial Cycles Jan 2019 1 / 26 2500.00 Recession SP 500

More information

Asset Pricing with Endogenously Uninsurable Tail Risks. University of Minnesota

Asset Pricing with Endogenously Uninsurable Tail Risks. University of Minnesota Asset Pricing with Endogenously Uninsurable Tail Risks Hengjie Ai Anmol Bhandari University of Minnesota asset pricing with uninsurable idiosyncratic risks Challenges for asset pricing models generate

More information

Sudden stops, time inconsistency, and the duration of sovereign debt

Sudden stops, time inconsistency, and the duration of sovereign debt WP/13/174 Sudden stops, time inconsistency, and the duration of sovereign debt Juan Carlos Hatchondo and Leonardo Martinez 2013 International Monetary Fund WP/13/ IMF Working Paper IMF Institute for Capacity

More information

Debt Overhang, Rollover Risk, and Investment in Europe

Debt Overhang, Rollover Risk, and Investment in Europe Debt Overhang, Rollover Risk, and Investment in Europe Ṣebnem Kalemli-Özcan, University of Maryland, CEPR and NBER Luc Laeven, ECB and CEPR David Moreno, University of Maryland September 2015, EC Post

More information

Capital Flows, Financial Intermediation and Macroprudential Policies

Capital Flows, Financial Intermediation and Macroprudential Policies Capital Flows, Financial Intermediation and Macroprudential Policies Matteo F. Ghilardi International Monetary Fund 14 th November 2014 14 th November Capital Flows, 2014 Financial 1 / 24 Inte Introduction

More information

1 Dynamic programming

1 Dynamic programming 1 Dynamic programming A country has just discovered a natural resource which yields an income per period R measured in terms of traded goods. The cost of exploitation is negligible. The government wants

More information

The Eurozone Debt Crisis: A New-Keynesian DSGE model with default risk

The Eurozone Debt Crisis: A New-Keynesian DSGE model with default risk The Eurozone Debt Crisis: A New-Keynesian DSGE model with default risk Daniel Cohen 1,2 Mathilde Viennot 1 Sébastien Villemot 3 1 Paris School of Economics 2 CEPR 3 OFCE Sciences Po PANORisk workshop 7

More information

Retirement in the Shadow (Banking)

Retirement in the Shadow (Banking) Retirement in the Shadow (Banking) Guillermo Ordoñez 1 Facundo Piguillem 2 1 University of Pennsylvania 2 EIEF October 6, 2015 1/37 Motivation Since 1980 the US has experienced fundamental changes: Large

More information

Dynamic Bank Capital Regulation in Equilibrium

Dynamic Bank Capital Regulation in Equilibrium Dynamic Bank Capital Regulation in Equilibrium Douglas Gale Andrea Gamba Marcella Lucchetta October 1, 2017 Abstract We study optimal bank regulation in an economy with aggregate uncertainty. Bank liabilities

More information

Misallocation and the Distribution of Global Volatility: Online Appendix on Alternative Microfoundations

Misallocation and the Distribution of Global Volatility: Online Appendix on Alternative Microfoundations Misallocation and the Distribution of Global Volatility: Online Appendix on Alternative Microfoundations Maya Eden World Bank August 17, 2016 This online appendix discusses alternative microfoundations

More information

Lecture Notes. Petrosky-Nadeau, Zhang, and Kuehn (2015, Endogenous Disasters) Lu Zhang 1. BUSFIN 8210 The Ohio State University

Lecture Notes. Petrosky-Nadeau, Zhang, and Kuehn (2015, Endogenous Disasters) Lu Zhang 1. BUSFIN 8210 The Ohio State University Lecture Notes Petrosky-Nadeau, Zhang, and Kuehn (2015, Endogenous Disasters) Lu Zhang 1 1 The Ohio State University BUSFIN 8210 The Ohio State University Insight The textbook Diamond-Mortensen-Pissarides

More information