Bank Equity and Macroprudential Policy

Paper number: 15/03

Paper date: March 10, 2015

Year: 2015

Paper Category: Discussion Paper

Authors

Keqing Liu

Abstract

We investigate a new macroprudential policy in a DSGE model with financial frictions. As Gertler, Kiyotaki and Queralto (2012), we propose to subsidize bank equities. However, our tax rate is different from their policy. The tax rate in our macroprudential policy is proportional to capital ratio gap while it is proportional to the shadow price of bank deposit in Gertler et al. (2012). Our policy has two advantages: Firstly, because bank's balance sheet structure is observable target for central bank, our policy is more applicable for practical policy design. Secondly, our policy makes individual banks choose to raise more capital. While it tightens the moral hazard constraint, the policy could raise the future value of investment and it shows the modified policy is welfare dominant.

Keywords: Macroprudential policy, Bank equity, Capital ratio, DSGE model
JEL classi…cation: C61, E61, G28

Bank Equity and Macroprudential Policy Bank Equity and Macroprudential Policy