June 2015 issue contents
Capital regulation in a macroeconomic model with three layers of default

by Laurent Clerc^a, Alexis Derviz^b, Caterina Mendicino^c, Stephane Moyen^d, Kalin Nikolov^e, Livio Stracca^f, Javier Suarez^g and Alexandros P. Vardoulakis^h

Abstract

We develop a dynamic general equilibrium model for the positive and normative analysis of macroprudential policies. Optimizing financial intermediaries allocate their scarce net worth together with funds raised from saving households across two lending activities, mortgage and corporate lending. For all borrowers (households, firms, and banks), external financing takes the form of debt which is subject to default risk. This "3D model" shows the interplay between three interconnected net worth channels that cause financial amplification and the distortions due to deposit insurance. We apply it to the analysis of capital regulation.

JEL Codes: E3, E44, G01, G21.

 
Full article (PDF, 55 pages, 2035 kb)

Discussion by Nobuhiro Kiyotaki

^a Banque de France 
^b Czech National Bank
^c Banco de Portugal and UECE
^d Deutsche Bundesbank
^e European Central Bank-DG Research
^f European Central Bank-DG International
^g CEMFI and CEPR
^h Board of Governors of the Federal Reserve System