DO BANK CAPITAL REQUIREMENTS AMPLIFY BUSINESS CYCLES? BRIDGING THE GAP BETWEEN THEORY AND EMPIRICS

In this paper we study the role of bank capital adequacy requirements in the transmission of aggregate productivity shocks. We identify a gap between the empirical and the theoretical work that studies the “credit crunch” effects of these requirements, and how they can work as a financial accelerato...

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Veröffentlicht in:Macroeconomic dynamics 2012-06, Vol.16 (3), p.358-395
Hauptverfasser: Aliaga-Díaz, Roger, Olivero, María Pía
Format: Artikel
Sprache:eng
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Zusammenfassung:In this paper we study the role of bank capital adequacy requirements in the transmission of aggregate productivity shocks. We identify a gap between the empirical and the theoretical work that studies the “credit crunch” effects of these requirements, and how they can work as a financial accelerator that amplifies business cycles. This gap arises because the empirical work faces some difficulties in identifying the effects of capital requirements, whereas the theory still lacks a structural framework that can address these difficulties. We bridge that gap by providing a general equilibrium theoretical framework that allows us to study this financial accelerator. The main insight we obtain is that the “credit crunch” and financial accelerator effects are rather weak, which confirms the findings of existing empirical work. Additionally, by developing a structural framework, we are able to provide an explanation for this result.
ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100510000623