DSGE Model with Government-Owned Banks

Abstract

How relevant are government-owned banks in the economy, especially in recessions? We study the role of government-owned banks in a dynamic stochastic general equilibrium (DSGE) model with heterogeneous financial intermediaries, heterogeneous households, and minimum capital requirement constraints. We show that the capitalization of government-owned banks during recessions smooths the effects of a negative shock and helps the economy to recover faster. However, these stabilizing effects could be partially offset by the inefficiency of these banks in transforming one unit of capital into loans. Therefore, ignoring the heterogeneity between private and government-owned banks may render misleading assessments and conclusions of the effects of economic policy on macroeconomic and banking variables. This is particularly important in evaluating the effectiveness of the macroprudential policy.

Keywords: government-owned banks, general equilibrium, capitalization, inefficiency