Slow Recoveries, Endogenous Growth and Macro-prudential Policy

41 Pages Posted: 15 Jun 2020 Last revised: 15 Mar 2021

Date Written: June 2, 2020

Abstract

Banking crises have severe short and long-term consequences. We develop a general equilibrium
model with financial frictions and endogenous growth in which macro-prudential policy
supports economic activity and productivity growth by strengthening bank’s resilience
to adverse financial shocks. The improved intermediation capacity of a safer banking system
leads to a higher steady state growth rate. The optimal bank capital ratio of 18% increases
welfare by 6.7%, 14 times more than in the case without endogenous growth. When the
economy enters a liquidity trap, the effects of financial disruptions and thus the benefits of
macro-prudential policy are even more significant.

Keywords: Slow Recoveries, Endogenous Growth, Financial Stability, Macroprudential Policy

JEL Classification: E32, E44, E52, G01, G18

Suggested Citation

Bonciani, Dario and Gauthier, David and Kanngiesser, Derrick, Slow Recoveries, Endogenous Growth and Macro-prudential Policy (June 2, 2020). Available at SSRN: https://ssrn.com/abstract=3616855 or http://dx.doi.org/10.2139/ssrn.3616855

Dario Bonciani

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

David Gauthier

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Derrick Kanngiesser (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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