Bank Capital and Aggregate Credit
Event details
| Date | 24.02.2015 |
| Hour | 12:15 › 13:15 |
| Speaker | Jean-Charles ROCHET (University of Zurich) |
| Location | |
| Category | Conferences - Seminars |
This paper seeks to explain the role of bank capital in fluctuations of lending and output. We build a continuous time equilibrium model of an economy in which commercial banks finance their loans by deposits and equity, while facing issuance costs when they raise new equity. The dynamics of the loan rate and the volume of lending in the economy are driven by aggregate bank capitalization. The model has a unique Markov competitive equilibrium that can be solved in closed form. We show that the competitive equilibrium is constrained inefficient: banks lend too much in upturns and too little in downturns. However, imposing a standard capital regulation does not help.
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