The role of bank capital in the propagation of shocks

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Working Paper ; No. 2008-36

Classification and Topics

• Classification: Wirtschaft ; Financial Markets and the Macroeconomy ; Monetary Policy ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: Transmission of monetary policy ; Financial institutions ; Financial system regulation and policies ; Economic models ; Zentralbank ; Bankmanagement ; Geldpolitik ; Geldmengensteuerung ; Transmissionsmechanismus ; Bilanz ; Kapitalmangel ; Wirtschaftskrise ; Bankenaufsicht

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Meh, Césaire ; Moran, Kevin
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2008

Further information

• DOI: doi:10.34989/swp-2008-36
• Handle: http://hdl.handle.net/10419/53891
• Last update: 10.03.2025, 11:44 AM CET