Slow recoveries, endogenous growth and macroprudential policy

42 Pages Posted: 5 May 2021

Date Written: April 23, 2021

Abstract

Banking crises have severe short and long‑term consequences. We develop a general equilibrium model with financial frictions and endogenous growth in which macroprudential 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 macroprudential 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 macroprudential policy (April 23, 2021). Bank of England Working Paper No. 917, Available at SSRN: https://ssrn.com/abstract=3838694 or http://dx.doi.org/10.2139/ssrn.3838694

Dario Bonciani (Contact Author)

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

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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