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Cyclical Implications of Changing Bank Capital Requirements in a Macroeconomic Framework
Author:
Mr. Eduardo J Ganapolsky
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Mr. Mario Catalan
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https://orcid.org/0000-0003-3165-822X
Series:
IMF Working Papers
Volume/Issue:
Volume 2005: Issue 168
Language:
English
Publication Date:
01 Aug 2005
DOI:
https://doi.org/10.5089/9781451861877.001
ISBN:
9781451861877
ISSN:
1018-5941
Pages:
36
Keywords:
WP; supply shock; income effect; marginal utility
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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There is a widespread view that bank capital requirements should be loosened during recessions and tightened during expansions to avoid excessive credit and output swings. This view is based on a partial analysis that ignores the effects of capital requirement policies on the saving decisions of households, and, through this channel, on bank loans and output. We present an intertemporal general equilibrium framework that accounts for such effects and evaluate the optimal responses to loan supply and productivity (loan demand) shocks. In contrast to the standard view, we show that, when loan supply is reduced, increasing the capital requirement allows a faster recovery of households' savings, loans, and output than a flat capital requirement policy. When productivity (loan demand) is reduced, lowering the capital requirement facilitates households' dissaving and amplifies the output decline, but enhances welfare. Finally, we show that if productivity reductions are anticipated-rather than unanticipated-by regulators, lowering the capital requirement preemptively enhances welfare through greater intertemporal smoothing of households' consumption and deposit holdings.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund