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on Financial Development and Growth |
By: | Alessandra Peter |
Abstract: | In this paper, I document systematic heterogeneity in ownership and financing of firms across Eurozone countries. To rationalize these differences, I build a quantitative general equilibrium model of workers and entrepreneurs who choose debt and equity financing of their firms, subject to rich country-specific financial frictions. The novel data on firm ownership and financing, combined with the structure of the model, allows me to quantify the level of debt and equity frictions in each country. Quantitatively, I find much larger output effects from equity frictions: harmonizing them across countries would lead to nearly four times larger output effects compared to debt frictions, and removing them would increase aggregate output by 75\% more. The larger impact on output is due not only to the estimated levels and dispersion of equity frictions, but also to the fact that equity provides greater risk sharing, which further incentivizes entrepreneurs to expand their firms. Through their effect on risk sharing, equity frictions also rationalize the observed negative relationship between equity financing and wealth inequality. Quantitatively, they are responsible for over 70\% of the explained variation in top wealth shares across countries. |
JEL: | E02 E44 G32 |
Date: | 2025–09 |
URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34301 |
By: | Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Wei Ma (Center for Economic Research, Shandong University, Jinan, 250100, China) |
Abstract: | We develop a monetary endogenous growth overlapping generations model characterized by investment adjustment costs as a negative function of productive government expenditures, and an inflation-targeting central bank. We show that growth dynamics arise, otherwise not possible in a standard monetary endogenous growth model with a money growth-rule and an exogenous adjustment cost parameter. Furthermore, hinging crucially on the strength of the response of the adjustment cost to productive public spending, single or multiple equilibria emerge, with the high-growth (low-growth) equilibrium in the latter case being stable (unstable), but locally indeterminate (locally determinate). |
Keywords: | Supply Investment adjustment costs, endogenous growth, inflation-targeting, growth dynamics |
JEL: | E22 E58 O42 |
Date: | 2025–09 |
URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202537 |
By: | Weiß, Maximilian; Dietrich, Alexander M.; Müller, Gernot J. |
JEL: | G51 Q54 E44 |
Date: | 2025 |
URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325455 |
By: | Eduardo Amaral; Rafael Guerra; Ilhyock Shim; Alexandre Tombini |
Abstract: | Global factors shaped financial conditions in Latin America in 2025, with exchange rate appreciations against the US dollar loosening conditions in most countries. Short-run monetary policy transmission in the region operates through financial conditions. In general, monetary easing leads to looser financial conditions and faster short-term output growth. Measurement of overall financial conditions depends on the methodologies and assumptions used to construct financial conditions indices (FCIs). Understanding these differences helps central banks to use FCIs as an input to monetary policy. |
Date: | 2025–09–29 |
URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:113 |
By: | Matthew Baron; Luc Laeven; Julien Pénasse; Yevhenii Usenko |
Abstract: | We study the mechanisms driving bank losses across historical banking crises in 46 economies and the effectiveness of policy interventions in restoring bank capitalization. We find that bank stocks experience large, permanent declines at the onset of crises. These losses predict commensurate long-term declines in banks’ earnings and dividends, rather than elevated future equity returns. Bank losses are primarily driven by write-downs of nonperforming assets, not asset sales during panics. Forceful liquidity-based interventions during crises predict only small, temporary increases in bank market value. Overall, these results suggest that bank losses during crises are not primarily due to temporary price dislocations. Early liquidity interventions can avert banking crises, but only under specific conditions. Once large bank equity declines have occurred, policy responses have historically failed to prevent persistent undercapitalization in the banking sector. |
JEL: | G01 G21 |
Date: | 2025–09 |
URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34288 |
By: | Seung Jung Lee; Anne Lundgaard Hansen |
Abstract: | This paper investigates the impact of the adoption of generative AI on financial stability. We conduct laboratory-style experiments using large language models to replicate classic studies on herd behavior in investment decisions. Our results show that AI agents make more rational decisions than humans, relying predominantly on private information over market trends. Increased reliance on AI-powered investment advice could therefore potentially lead to fewer asset price bubbles arising from animal spirits that trade by following the herd. However, exploring variations in the experimental settings reveals that AI agents can be induced to herd optimally when explicitly guided to make profit-maximizing decisions. While optimal herding improves market discipline, this behavior still carries potential implications for financial stability. In other experimental variations, we show that AI agents are not purely algorithmic, but have inherited some elements of human conditioning and bias. |
Keywords: | Herd behavior; Large language models; AI-powered traders; Financial markets; Financial stability |
JEL: | C90 D82 G11 G14 G40 |
Date: | 2025–09–26 |
URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-90 |
By: | Kumhof, Michael |
JEL: | E44 E52 G21 |
Date: | 2025 |
URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325358 |
By: | Chadha, J. S.; Corrado, G.; Corrado, L.; Buratta, I. D. L. |
Abstract: | We investigate whether macroprudential policies support broader economic stability, particularly the welfare of households. For this purpose, we develop a New Keynesian business cycle model with agents subject to credit constraints and asset price fluctuations. The model differentiates between savers, who own firms and banks, and borrowers. The commercial bank sets the loan rate as a function of risk, specifically the value of housing collateral. We use occasionally binding constraints to capture nonlinearities arising from the zero lower bound (ZLB) on the policy interest rate and the borrowing constraint faced by borrower households. We examine two macroprudential tools: a countercyclical loan-to-value (LTV) ratio and a bank reserve requirement. We find that macroprudential tools significantly reduce the volatility of consumption and lending cycles and decrease both the expected frequency and severity of ZLB episodes. More generally, by attenuating the variance of the business cycle, particularly for borrower households, macroprudential tools reduce the need for monetary policy interventions. |
JEL: | E32 E44 E51 E58 E62 |
Date: | 2025–09–13 |
URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2561 |
By: | Giuzio, Margherita; Kapadia, Sujit; Kaufmann, Christoph; Storz, Manuela; Weistroffer, Christian |
Abstract: | This paper examines the interplay between macroprudential policy, monetary policy and the non-bank financial intermediation (NBFI) sector, drawing on recent research and zooming in particularly on evidence from the euro area2. It documents the growth in the NBFI sector over the past two decades and its particular role in financing the real economy, assesses systemic risks that can emanate from the sector, considers how it interacts with monetary policy, and discusses the implications for macroprudential regulation. Firms are increasingly turning to capital markets for debt financing, with the NBFI sector thereby increasing its provision of credit to the real economy relative to banks. At the same time, the growth of market-based finance has been accompanied by increased liquidity and credit risk in the NBFI sector, together with pockets of high leverage. Monetary policy has also intersected with these dynamics. Recent episodes have shown that vulnerabilities in the NBFI sector can amplify market dynamics and create systemic risk in a highly interconnected financial system. Against this backdrop, the resilience of the NBFI sector should be strengthened, including from a macroprudential perspective, to support financial stability and the smooth transmission of monetary policy. Several open issues and challenges remain for future research and policy making. JEL Classification: G01, G23, G28 |
Keywords: | financial regulation, financial stability, insurance corporations, investment funds, monetary policy, non-bank financial intermediation |
Date: | 2025–10 |
URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253130 |
By: | Nobuhiro Abe (Bank of Japan); Yuto Ishikuro (Bank of Japan); Koki Nakayama (Bank of Japan); Yutaro Takano (Bank of Japan) |
Abstract: | Do heterogeneity and competition among banks matter for the macroeconomy? To address this question, we develop a Heterogeneous Bank New Keynesian (HBANK) model that incorporates oligopolistic competition among banks in both loan and deposit markets into an otherwise canonical New Keynesian model. We calibrate model parameters for the cost structure and demand for loans and deposits using data of the 170 largest banks in the U.S. Differences in the parameter values reflect differences among banks in the size of duration risk they take, markups of loan rates, and markdowns of deposit rates. Based on simulation exercises, we show that aggregate lending becomes more responsive to monetary and productivity shocks in our HBANK model than in a Representative Bank New Keynesian model (RBANK), primarily because of heterogeneity in duration risk and the responsiveness of loan markups among banks. |
Keywords: | banking, business cycles |
JEL: | E32 E43 E44 E52 G21 |
Date: | 2025–09–29 |
URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp25e09 |
By: | Heng-fu Zou |
Abstract: | This paper develops a unifed theoretical framework that integrates institutional quality into affine term structure models of interest rates. Building on a Lucas-tree economy with endogenous institutional capital, we derive the stochastic discount factor and show that zero-coupon bond prices admit an exponential-affine form. Using the Feynman-Kac representation, we obtain explicit Riccati equations and closed-form solutions under Vasicek- and CIR-type institutional dynamics. The analysis reveals how institutional persistence, mean reversion, and volatility affect the slope and curvature of the yield curve, generating distinct term premia across maturities. Comparative statics highlight that stronger and more stable institutions lower risk premia, while fragile or volatile institutions amplify borrowing costs. The framework bridges political economy and asset pricing, showing that institutional reforms not only promote long-run growth but also shape sovereign debt markets, financial development, and macroeconomic stability. |
Keywords: | Institutional capital; Affine term structure; Bond pricing; Lucas-tree model; Feynman-Kac formula; Vasicek model; CIR model; Sovereign yields; Political economy; Risk premia |
Date: | 2025–08–21 |
URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:788 |
By: | Giancarlo Corsetti; Anna Lipinska; Giovanni Lombardo |
Abstract: | We study international risk sharing across countries differing in size, openness, and productivity distributions, emphasizing fat tails. In a canonical IRBC model, safer economies benefit through asset and terms-of-trade revaluations, while riskier ones smooth consumption at the cost of lower wealth. Calibrated to non-Gaussian shocks, country size and openness, the model predicts welfare gains between 0.03% and 6.9% of permanent consumption (median 6%). Assuming Gaussian shocks reduces gains by about 2 percentage points, while assuming equal country size and no home bias renders them negligible. Clustering economies by openness, size, and higher moments accounts for the cross-country distribution of gains. |
Keywords: | asymmetries in risk, openness, country size, tail risk, gains from risk sharing, consumption smoothing, terms of trade, wealth transfers |
JEL: | F15 F41 G15 |
Date: | 2025–10 |
URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1293 |
By: | Viktors Stebunovs |
Abstract: | A cornerstone of the law-and-finance literature is that stronger institutions reduce financial intermediation costs. Using global data on cross-border payment costs, I show this relationship can reverse in heavily regulated sectors. Anti-money laundering risks have larger cost effects in advanced economies with strong enforcement than in developing countries with weak enforcement, despite the former having lower underlying risks. This counterintuitive pattern reflects strong institutions operating through two channels: Directly reducing costs through risk mitigation and forcing risk-based pricing that eliminates cross-subsidization. The net results demonstrate that traditional studies can miss heterogeneity by not controlling for risk levels: Strong institutions benefit low-risk jurisdictions but force high-risk ones to pay higher costs for their risk profiles. Policy implications favor improving enforcement and lowering risks rather than treating these as substitutes. The findings have implications for emerging payment rails, such as regulated payment stablecoins, which face similar AML requirements. |
Keywords: | Cross-border payments; Anti-money laundering; Institutional quality; Law enforcement; Compliance costs; Competitive forces; Risk-based pricing; Regulated payment stablecoins |
JEL: | F20 F24 F30 G20 G21 G23 G28 G50 |
Date: | 2025–09–25 |
URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1422 |
By: | Tetiana Unkovska; Sergei Konoplyov |
Abstract: | Global imbalances have been building up in the world economy for decades and have reached critical levels, giving rise to tariff confrontations, trade wars, and geopolitical tensions. This paper presents our systemic analysis of three global imbalances: international trade, debt dynamics, and finance. Based on our new systemic concept of global imbalances and analysis of a large body of historical and latest financial and economic data in various countries and the world economy, we have concluded that these three global imbalances are closely interconnected and mutually influence each other through different channels and nonlinear feedback mechanisms that we describe. These three global imbalances are interrelated symptoms of deep structural problems in the global economy that require corrective measures both at the level of individual countries, especially the US and China, and at the global coordinated efforts by key countries within the G7 and G20. We highlight the key structural problems in the global economy, suggest a modern interpretation of the Triffin dilemma through the prism of equilibrium levels of exchange rates, and suggest possible measures to mitigate the global imbalances. |
Keywords: | Trade, Foreign Direct Investment |
Date: | 2025–08 |
URL: | https://d.repec.org/n?u=RePEc:glh:wpfacu:252 |
By: | Castells-Jauregui, Madalen; Kuvshinov, Dmitry; Richter, Björn; Vanasco, Victoria |
Abstract: | Using novel data on sectoral safe asset positions in 21 advanced economies since 1980, we document the central role of the foreign sector in the market for safety and its macroeconomic implications. We show that safe asset holdings have expanded significantly relative to GDP, driven by rising net holdings of the foreign sector and accommodated by increased issuance from the financial and public sectors. Furthermore, fluctuations in safe assets are almost exclusively driven by the foreign and financial sectors, with close links between the two. Finally, increases in foreign demand for safety-or its counterpart, the supply by financials-are associated with domestic credit expansions and weaker medium-term output growth, both in raw data and when using FX reserve accumulation in Asian economies as instrument. JEL Classification: E42, E44, E51, F33, F34, G15 |
Keywords: | business cycles, capital flows, financial accounts, financial stability, safe assets |
Date: | 2025–09 |
URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253126 |
By: | Arvai, Kai; Coimbra, Nuno |
JEL: | E42 F02 F33 N10 |
Date: | 2025 |
URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325376 |
By: | Linda S. Goldberg; Samantha Hirschhorn |
Abstract: | Global factors, like monetary policy rates from advanced economies and risk conditions, drive fluctuations in volumes of international capital flows and put pressure on exchange rates. The components of international capital flows that are described as global liquidity—consisting of cross-border bank lending and financing of issuance of international debt securities—have sensitivities to risk conditions that have evolved considerably over time. This risk sensitivity has been driven, in part, by the composition and business models of the financial institutions involved in funding. In this post, we ask whether these same features have led to changes in the pressures on currency values as risk conditions evolve. Using the Goldberg and Krogstrup (2023) Exchange Market Pressure (EMP) country indices, we show that the features of financial institutions in the source countries for international capital do influence how destination countries experience currency pressures when risk conditions change. Better shock-absorbing capacity in financial institutions moderates the pressures toward depreciation of currencies during adverse global risk events. |
Keywords: | currency; depreciation; Foreign exchange market; risk; bank capital |
JEL: | F3 |
Date: | 2025–09–22 |
URL: | https://d.repec.org/n?u=RePEc:fip:fednls:101760 |
By: | José M. Menudo (Department of Economics, Universidad Pablo de Olavide) |
Abstract: | This article reinterprets the 1825 financial crisis by recovering the overlooked contribution of Álvaro Flórez Estrada, a Spanish economist whose 1826 pamphlet proposed a bullion-scarcity thesis as the root cause of financial collapse. Rather than attributing the crisis to speculative mania or domestic mismanagement, Flórez linked monetary contraction to the disruption of silver and gold inflows from Latin America following independence wars. Drawing on archival pamphlets, economic correspondence, and periodicals, the article traces the transnational circulation of Flórez’s ideas—through parliamentary debate in Britain, journalistic controversies in France, metaphorical reframing in Italy, and reprinting in postcolonial Latin America. By centering a Hispanic interpretation of crisis causality, the article challenges Anglo-centric narratives and reframes early financial thought as inherently global, multilingual, and geopolitically embedded. |
Keywords: | Classical Economics; Economic crisis; Spread of economic ideas; Early modern period; Monetary policy |
JEL: | B31 B12 B19 N2 B41 E5 |
Date: | 2025 |
URL: | https://d.repec.org/n?u=RePEc:pab:wpaper:25.08 |
By: | Victor Le Coz (LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique, MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec - Université Paris-Saclay); Michael Benzaquen (LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique, CFM - Capital Fund Management); Damien Challet (MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec - Université Paris-Saclay, FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec - Université Paris-Saclay) |
Abstract: | We propose a minimal model of the secured interbank network able to shed light on recent money markets puzzles. We find that excess liquidity emerges due to the interactions between the reserves and liquidity ratio constraints; the appearance of evergreen repurchase agreements and collateral re-use emerges as a simple answer to banks' counterparty risk and liquidity ratio regulation. In line with prevailing theories, re-use increases with collateral scarcity. In our agent-based model, banks create money endogenously to meet the funding requests of economic agents. The latter generate payment shocks to the banking system by reallocating their deposits. Banks absorbs these shocks thanks to repurchase agreements, while respecting reserves, liquidity, and leverage constraints. The resulting network is denser and more robust to stress scenarios than an unsecured one; in addition, the stable bank trading relationships network exhibits a core-periphery structure. Finally, we show how this model can be used as a tool for stress testing and monetary policy design. |
Date: | 2025 |
URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05273328 |
By: | Alessandro Gioffré (University of Florence); Gabriele Camera (Economic Science Institute, Chapman University) |
Abstract: | Tokenization of assets has multiple implications for the operation of financial markets, among which are mitigating trade frictions and improving the interconnectedness of financial firms. This feature—if not properly managed—can propagate shocks more widely as compared to a traditional system. We study this double-edged aspect of tokenization using a matching model that makes explicit how firms are exposed to counterparty risk. We propose a way to manage this increased risk, through Financial Transactions Limiters, which exploit the technical advantages of tokenization in monitoring financial transactions of individual firms. We numerically analyze the possible social welfare consequences of tokenization, in both the short and long run, based on the economy’s fundamentals. |
Keywords: | matching models, fintech, contagion |
JEL: | C6 D6 E5 |
Date: | 2025 |
URL: | https://d.repec.org/n?u=RePEc:chu:wpaper:25-08 |
By: | Peter Bofinger |
Abstract: | The paper discusses the functions and the potential of stablecoins as an innovative payment system: Stablecoins constitute a new payment object which can be used for a direct exchange on the infrastructures provided by blockchains and crypto exchanges. For the discussion of stablecoins It is important to distinguish between bond-based and bank-based stablecoins: While the former use bank deposits as collateral, the latter use short-term treasuries. Bond-based stablecoins have an attractive business model. They enable direct international.payments, i.e. without an intermediary, based on a safe transaction asset. Market dynamics reveal significant network effects: the system is characterized by the US dollar as the dominant currency denomination, a duopoly of two issuers, and a small number of blockchains. In the last few years, the dominant issuers have demonstrated resilience even during periods of economic shocks. The macroeconomic effects of bank-based stablecoins are limited, since they cannot create loans. However, bond-based stablecoins can create money by purchasing government bonds. While bank-based stablecoins create financial stability risks by interconnecting banks and stablecoin issuers, bond-based stablecoins do not present this risk. The Digital Euro is not an alternative to stablecoins: Its use is limited to the euro area, it is designed for retail payments and it only allows asset holdings for private households. |
Keywords: | crypto currencies, blockchain, stablecoins. Digital Euro, cyrpto exchanges |
Date: | 2025 |
URL: | https://d.repec.org/n?u=RePEc:imk:studie:100-2025 |
By: | Masyayuki Okada (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: masayuki.okada@boj.or.jp)); Kazuhiro Teramoto (Graduate School of Economics, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo, Japan. 186-8603. (Email: k.teramoto@r.hit-u.ac.jp)) |
Abstract: | This paper proposes a novel mechanism explaining why large firms exhibit stronger stock price responses to monetary policy surprises. Empirically, we show that endogeneity arising from the ex-post predictability of these surprises disproportionately affects large firms, leading to overestimated stock return responses. We develop an asset pricing model with granular-origin aggregate fluctuations and investors' imperfect knowledge of monetary policy rule parameters. The model demonstrates that belief revisions about the policy stance drive both monetary policy surprises and heterogeneous stock price responses through changes in the risk premium - even without investor heterogeneity or differential effects of policy shocks on firm fundamentals. |
Keywords: | monetary policy surprises, stock returns, high-frequency identification, partial information, learning, granular-origin aggregate fluctuations |
JEL: | E43 E44 E52 E58 G12 |
Date: | 2025–08 |
URL: | https://d.repec.org/n?u=RePEc:ime:imedps:25-e-06 |
By: | Ufuk Akcigit; Harun Alp; Jeremy Pearce; Marta Prato |
Abstract: | This paper studies how individuals sort into entrepreneurship and invention-related occupations and how their interactions shape innovation and economic growth. We develop an endogenous growth model in which occupational sorting jointly determines the supply of R&D talent and entrepreneurs’ demand for it. Empirically, using Danish microdata, we show that transformative entrepreneurs—those who hire R&D workers—tend to have higher IQ and education and build faster-growing firms than other entrepreneurs. Quantitatively, the estimated model indicates that financial barriers to education misallocate talent; alleviating them through education subsidies increases both demand and supply of R&D workers, raising innovation and long-run growth. Broad startup subsidies are ineffective. |
Keywords: | entrepreneurship; R&D Policy; innovation; IQ; endogenous growth |
JEL: | O31 O38 O47 J24 |
Date: | 2025–09–01 |
URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:101780 |
By: | Mike Eggleston |
Abstract: | Explore evolving trends in small business lending, the impact of banking deserts and the shifting preferences of small firms toward larger banks. |
Keywords: | small businesses; lending; commercial banking |
Date: | 2025–09–23 |
URL: | https://d.repec.org/n?u=RePEc:fip:l00001:101767 |
By: | Klonner, Stefan; Xie, Min |
JEL: | O16 |
Date: | 2025 |
URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325440 |
By: | Abdul Ghaffar (BZU - Bahauddin Zakariya University); Muhammad Asif (Ghazi University); Areeba Ejaz (Ghazi University); Kashif Raza (Ghazi University) |
Abstract: | Digital financial inclusion (DFI) initiatives have transformed the economy and environment by providing previously underbanked regions with enhanced access to banking, payment processing, and other financial services. This study analyses the correlations among DFI, GDP growth, and ecological sustainability, using the rapid expansion of digital finance in China as a case study. The research used econometric models to examine the impact of DFI on GDP growth and CO₂ emissions, including factors such as renewable energy adoption, industrial efficiency, and trade patterns. This purpose employs panel data from many national and international sources. The results demonstrate that reduced carbon intensity and improved economic inclusion correlate with heightened DFI penetration. Improved resource allocation, less travel for transactions, and increased green investment flows contribute to lower carbon intensity. The results suggest that DFI may fulfil climate action goals while promoting equitable growth, benefiting policymakers aiming to include financial innovation in sustainable development plans. |
Keywords: | Digital Financial Inclusion, Sustainable Development, Digital Governance, China Natural Resources, China, Natural Resources, Natural Resources Digital Financial Inclusion Sustainable Development Digital Governance China Natural Resources Digital Financial Inclusion Sustainable Development Digital Governance China |
Date: | 2025–08–31 |
URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05236350 |
By: | Cristina Badarau (University of Bordeaux); Corentin Roussel (University of Strasbourg) |
Abstract: | This paper examines whether a Counter-Cyclical Buffer (CCyB) indexed to carbon-intensive credits, i.e., a carbon-intensive CCyB, is consistent with the banking stability objectives of financial regulators when unregulated banks operate in credit markets. To do so, we assess the consistency of the carbon-intensive CCyB regulation through the lens of a general equilibrium model that encompasses polluting and non-polluting firms (i.e., green and brown firms, respectively), as well as traditional and shadow banks (i.e., regulated and unregulated banks, respectively). We find that a carbon-intensive CCyB regulation is not the most suitable for financial regulators when there are no asymmetric leakages between green and brown loans for traditional and shadow banks. However, a strict emissions tax applied to the production of brown firms favors the adoption of a carbon-intensive CCyB regulation by financial regulators. Moreover, a carbon-intensive CCyB could be suitable when traditional banks are more involved in the green credit market than in the brown one. This last result highlights the need for regulators to carefully coordinate their green policies to avoid jeopardizing the stability of the banking system. |
Keywords: | Counter-cyclical capital buffers, carbon-intensive credits, shadow banks, General Equilibrium Model |
JEL: | E G Q |
Date: | 2025 |
URL: | https://d.repec.org/n?u=RePEc:inf:wpaper:2025.14 |