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Essays in macroeconomic and macroprudential policies.

In this dissertation, I focus on macroeconomic and macroprudential policies. In Chapter 1, I study the effectiveness of macroprudential policy tools on bank risk. The findings show that although macroprudential policy tools can stabilize the financial system, under certain conditions, they might have perverse effects. In Chapter 2, I examine monetary aggregates, and show that once measured correctly, they can be useful in gauging the stance of monetary policy. In Chapter 3, by studying the deter- minants of sovereign debt crises, I aim at improving our understanding of sovereign debt distress, and also strengthening the toolkit for crisis prevention. Chapter 1: Following the 2007-2009 financial crisis, there has been an increase in the use of macroprudential policy tools – such as loan-to-value ratio caps and interbank exposure limits – to achieve financial stability. Existing research on the effectiveness of macroprudential policy has focused on country-level variables such as total credit growth and house price inflation. In “The Effectiveness of Macropruden- tial Policy on Bank Risk,” I study how the effectiveness of macroprudential policy varies across banks and policy tools. Using system GMM on bank-level data from 30 European countries for the time period between 2000 and 2014, I document that stricter regulation in the form of exposure limitations tends to decrease banks’ risk levels whereas capital-based tools tend to induce higher risk-taking. After a policy tightening, loan loss provisions and non-performing loans ratios of banks suffering losses can increase substantially, up to five percentage points, while they are likely to decrease for profitable banks. Constraining activities by stricter regulation can lead to a search for yield. Therefore, policy designers should pay particular attention to the increase in risk-taking following policy tightening, especially by banks suffering losses. Chapter 2: It is crucial for policymakers to successfully gauge the stance of mon- etary policy and understand the mechanisms through which it affects the economy. Conventional models focus on interest rates alone, and omit monetary aggregates from policy discussions. In “Do Monetary Aggregates Belong in a Monetary Model? Evidence from the UK,” I examine whether augmenting the measure of monetary policy with monetary aggregates helps in drawing more robust links between policy and economic fluctuations. After constructing the Divisia money index for the United Kingdom, I employ structural vector autoregression to identify two different episodes of UK monetary policy regimes. Inclusion of this (correct) measure of the quantity of money and disentangling money supply from money demand remedy the price and liquidity puzzles which frequently appear in the vector autoregression literature. The results point to the informational content embedded in monetary aggregates, and suggest that monetary aggregates should be taken into account while evaluating monetary policy. Chapter 3: In assessing debt sustainability for advanced and emerging markets, the IMF’s Market Access Countries’ Debt Sustainability Analysis (MAC DSA) com- pares the levels of debt and gross financing needs (GFNs) against benchmarks sepa- rately derived from the noise-to-signal approach. In “Determinants of Sovereign Debt Crises,” I identify the main factors that contribute to sovereign debt crises. I take into account a broad range of debt distress drivers, including debt levels and gross fi- nancing needs, but also debt composition, macroeconomic fundamentals, and country characteristics such as whether the country is a small state or member of a currency union. By using the estimation results, I first derive an indicative cutoff probability of debt distress level. Then, I calculate the corresponding thresholds for debt variables, above which countries are predicted to experience an episode of debt distress.

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Essays on Macroprudential Policies, Non-bank Financing, and Welfare

CHAWWA, TEVY (2019) Essays on Macroprudential Policies, Non-bank Financing, and Welfare. Doctoral thesis, Durham University.

This thesis contributes to the emerging literature of macroprudential policy by investigating the macroeconomic and welfare impacts of various regulations in banking sector. First, I examine the long-run impact of government subsidies on the bank’s information costs by evaluating the combination of different types of subsidies and taxes. By extending the basic model of De Fiore & Uhlig (2015), I find that subsidy on bank’s information acquisition cost improves aggregate welfare if the government funds the subsidy with labour-income tax or lump-sum tax. In contrast, subsidy on monitoring cost generates welfare losses for both the household and the entrepreneur. Therefore, government supports in lowering the costs of bank access are preferable to government supports for default resolution costs. Second, I evaluate the effectiveness of the macroprudential policy in a framework that accounts for the possible substitution from bank-based financial intermediation to non-bank intermediation in response to the policy. Employing the model of De Fiore & Uhlig (2015), I find that a countercyclical macroprudential regulation improves welfare in the case of banking shocks and uncertainty shocks but not in the case of technology shocks. A modified rule, which reacts not only to bank credit growth but to total credit growth, provides welfare gains in the case of technology shocks. Consequently, macroprudential authorities should consider not only the condition of the banking sector but also the non-banking financial markets. Finally, I study the impact of the reserve requirement and Liquidity Coverage Ratio (LCR) by extending the framework of Gerali et al. (2010). I find that the effect of the two liquidity requirements on lending and output are relatively similar. However, changing the LCR has consequences on demand for government bonds, and thus different impacts on taxes, household deposits and bank’s profit. I also find that countercyclical liquidity regulations can improve welfare and reduce the volatility of bank loans.

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Essays on macroprudential policy and financial stability : the case of South Africa

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Essays on International Macroprudential Policy Interactions

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Essays on banking crises, sovereign default, and macroprudential policy Open Access

Zaretski, aliaksandr (spring 2022).

Chapter 1 studies the optimal regulation of a banking system in a quantitative general equilibrium environment with endogenously incomplete markets. Financial intermediaries issue deposits to households under limited liability and with limited enforcement, invest in the real economy with state-contingent returns, and face survival risk. Pecuniary externalities affect the forward-looking bank value and the value of default through asset prices and asset returns, justifying system-wide regulation, e.g., balance sheet taxation or minimum capital requirements. An alternative way to improve welfare is through "preemptive bailouts": expected future transfers relax the current financial constraints, mitigating the enforcement friction and decreasing the probability of financial crises.

Chapter 2 explores the normative implications of the transmission of sovereign risk to the banking sector. Both banks and foreign lenders invest in risky sovereign debt. The sovereign's financial standing is a two-state Markov chain calibrated to match the observed sovereign default and exclusion events. The resulting Markov-switching DSGE model is solved using global methods. Subsidizing lending to the real sector in both good and bad times improves welfare and reduces the probability of banking crises. A bank net worth subsidy in good times combined with a tax in bad times achieves qualitatively similar but quantitatively smaller effects.

Chapter 3 characterizes optimal government policy in a sticky-price economy with different types of consumers and endogenous financial constraints in the banking and entrepreneurial sectors. The competitive equilibrium allocation is constrained inefficient due to pecuniary externalities and other externalities arising from consumer type heterogeneity. These externalities can be corrected with appropriate fiscal instruments. Independently of the availability of such instruments, optimal monetary policy aims to achieve price stability in the long run, as in the conventional New Keynesian environment. Compared to the competitive equilibrium, the constrained efficient allocation significantly improves between-agent risk sharing, approaching the unconstrained Pareto optimum and leading to sizable welfare gains. Such an allocation has lower leverage in the banking and entrepreneurial sectors and is less prone to the boom-bust financial crises and zero-lower-bound episodes observed occasionally in the decentralized economy.

Table of Contents

1 Optimal macroprudential policy with preemptive bailouts 1

1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1.2 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1.2.1 Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

1.2.2 Bankers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

1.2.3 Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

1.2.4 Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1.2.5 Market clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1.2.6 Competitive equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1.3 Normative analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

1.3.1 Sources of inefficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

1.3.2 Constrained efficient allocation under commitment . . . . . . . . . . . . . . . 20

1.3.3 Markov perfect equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

1.3.4 Implementation with taxes, transfers, and capital requirements . . . . . . . . 29

1.4 Quantitative results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

1.4.1 Calibration and computation . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

1.4.2 Bank solvency and EC regimes . . . . . . . . . . . . . . . . . . . . . . . . . . 34

1.4.3 Financial crises in the unregulated economy . . . . . . . . . . . . . . . . . . . 37

1.4.4 Markov perfect equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

1.4.5 Ramsey equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

1.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

1.A Proofs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

1.A.1 Proposition 1.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

1.A.2 Lemma 1.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

1.A.3 Proposition 1.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

1.A.4 Proposition 1.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

1.A.5 Proposition 1.4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

2 Sovereign risk, banking crises, and macroprudential policy 73

2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

2.2 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

2.2.1 Sovereign debt market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

2.2.2 Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

2.2.3 Bankers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

2.2.4 Final good producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

2.2.5 Capital good producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

2.2.6 Foreign lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

2.2.7 Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

2.2.8 Market clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

2.3 Quantitative analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

2.3.1 Calibration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

2.3.2 Crisis experiments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

2.4 Macroprudential policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

2.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

2.A Aggregate budget constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

2.B Solution method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

3 Financial constraints, risk sharing, and optimal monetary policy 95

3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

3.2 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

3.2.1 Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

3.2.2 Bankers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

3.2.3 Entrepreneurs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

3.2.4 Capital, retail, and final good production . . . . . . . . . . . . . . . . . . . . 106

3.2.5 Market clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

3.2.6 Competitive equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

3.3 Normative analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

3.3.1 Flexible-price economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

3.3.2 Sticky-price economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

3.4 Quantitative results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

3.4.1 Calibration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

3.4.2 Welfare comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

3.4.3 Risk sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

3.4.4 Wedges and overborrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

3.4.5 Financial crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

3.4.6 Zero lower bound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140

3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

3.A Proofs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

3.A.1 Lemma 3.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

3.A.2 Lemma 3.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

3.A.3 Lemma 3.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

3.A.4 Proposition 3.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

3.A.5 Proposition 3.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

3.A.6 Lemma 3.4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

3.A.7 Lemma 3.5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

3.A.8 Proposition 3.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

3.A.9 Proposition 3.4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

3.A.10 Proposition 3.5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

Bibliography 166

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Macroprudential Policy Effects: Evidence and Open Questions

Author/Editor:

Nina Biljanovska ; Sophia Chen ; Gaston Gelos ; Deniz O Igan ; Maria Soledad Martinez Peria ; Erlend Nier ; Fabian Valencia

Publication Date:

March 27, 2023

Electronic Access:

Free Download . Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: The views expressed herein are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

The global financial crisis (GFC) underscored the need for additional policy tools to safeguard financial stability and ultimately macroeconomic stability. Systemic financial vulnerabilities had developed under a seemingly tranquil macroeconomic surface of low inflation and small output gaps. This challenged the precrisis view that achieving these traditional policy targets was a sufficient condition for macroeconomic stability. Thus, new tools had to be deployed to target specific financial vulnerabilities and to build buffers to cushion adverse aggregate shocks, while allowing traditional policy levers, including monetary and microprudential policies to focus on their traditional roles. Macroprudential policy measures emerged as the solution to this gap. Some of these measures had been used before the GFC (mostly in emerging markets). But it was only after the crisis that they were more widely adopted, and the toolkit expanded. This spurred a growing body of empirical research on the effects and potential shortfalls of these measures, with a further deepening of this knowledge gaining importance as policymakers confront increased financial stability risks in the post-pandemic world. Recognizing that there still is much to learn, this paper takes stock of our expanding understanding about the effects (and side effects) of macroprudential measures by focusing on these questions: What have we learned about the effects of macroprudential policy in containing the buildup of vulnerabilities? What do we know about the effects on economic activity and resilience? How do policy effects vary with conditions and over time? How important are leakages and circumvention? How do the effects on credit depend on other policies?

Departmental Paper No 2023/002

Bank credit Countercyclical capital buffers Credit Financial regulation and supervision Financial sector policy and analysis International organization Macroprudential policy Macroprudential policy instruments Money Political economy

March 31, 2023

9798400226304/2616-5333

Please address any questions about this title to [email protected]

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Essays on macroeconomic policy

Kirsanov, Oleg (2020) Essays on macroeconomic policy. PhD thesis, University of Glasgow.

This thesis contains three chapters. All chapters study different aspects of macroeconomic policy. The first chapter studies discretionary monetary policy in an economy where economic agents have quasi-hyperbolic discounting. It demonstrates that a benevolent central bank is able to keep inflation under control for a wide range of discount factors. If the central bank, however, does not adopt the household's time preferences and tries to discourage early-consumption and delayed-saving, then a marginal increase in steady state output is achieved at the cost of a much higher average inflation rate. Indeed, it shows that it is desirable from a welfare perspective for the central bank to quasi-hyperbolically discount by more than households do. Welfare is improved because this discount structure emphasizes the current-period cost of price changes and leads to lower average inflation. It contrasts the results with those obtained when policy is conducted according to a Taylor-type rule. The second chapter analyses the effect of endogenous discounting on wealth inequality in an endowment economy with heterogeneous agents, subject to occasionally binding borrowing constraint. It demonstrates that introduction of Uzawa-type preferences may launch a strong redistribution mechanism leading to high equilibrium real interest rate and a more dispersed wealth distribution in comparison to the model with standard preferences. The third chapter studies macroprudential policy in a macro-model with a heterogeneous banking sector, prone to asymmetric information and moral hazard a la Boissay et.al. (2016). This model is shown to generate financial crises when a sequence of small positive technology shocks can lead to an increase in lending, as well as to a reduction in all market rates. This paper investigates a scope for a macroprudential policy that would reduce probability of a financial crisis, but not lead to a too sharp reduction in a social welfare. It demonstrates that the introduction of a direct proportional tax on interbank lending can substantially reduce the amount of credit and reduce probability of a financial crisis.

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The University of Glasgow is a registered Scottish charity: Registration Number SC004401

• DOI: 10.2139/ssrn.2182741
• Corpus ID: 12076264

Macroprudential Policy: Its Effects and Relationship to Monetary Policy

• Hyunduk Suh
• Published 9 November 2012
• ERN: Dynamic Stochastic General Equilibrium Models (Topic)

36 Citations

Macroprudential policy in a dsge model: anchoring the countercyclical capital buffer.

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Modelling Alternative Macroprudential Policies with Financial Frictions

Frequency-specific effects of macroprudential policies∗, optimal macroprudential policy, macroeconomic uncertainty and its fiscal effects: an analysis from natural language processing and dynamic stochastic general equilibrium models (dsge), public debt management and the interaction between fiscal and monetary policies, leaning-against-the-wind: which policy and when, the macroeconomic effects of monetary policy shocks under fiscal constrained, literature review on the influence of two-pillar policy on risk-taking of commercial banks, unemployment or credit: which one holds the potential results for a small open economy with a low degree of financialization, 17 references, bank capital regulation, the lending channel and business cycles.

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Fiscal Policy in a Model With Financial Frictions

Inefficient credit booms, shocks, structures or monetary policies the euro area and us after 2001, house prices, borrowing constraints and monetary policy in the business cycle, optimal simple and implementable monetary and fiscal rules, bank lending and property prices in hong kong, the financial accelerator in a quantitative business cycle framework, staggered prices in a utility-maximizing framework, related papers.

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