Essays on Macroprudential Policies, Non-bank Financing, and Welfare

Abstract

This thesis contributes to the emerging literature of macroprudential policy by investigating the macroeconomic and welfare impacts of various regulations in banking sector.
First, I examine the long-run impact of government subsidies on the bank’s information costs by evaluating the combination of different types of subsidies and taxes. By extending the basic model of De Fiore & Uhlig (2015), I find that subsidy on bank’s information acquisition cost improves aggregate welfare if the government funds the subsidy with labour-income tax or lump-sum tax. In contrast, subsidy on monitoring cost generates welfare losses for both the household and the entrepreneur. Therefore, government supports in lowering the costs of bank access are preferable to government supports for default resolution costs.
Second, I evaluate the effectiveness of the macroprudential policy in a framework that accounts for the possible substitution from bank-based financial intermediation to non-bank intermediation in response to the policy. Employing the model of De Fiore & Uhlig (2015), I find that a countercyclical macroprudential regulation improves welfare in the case of banking shocks and uncertainty shocks but not in the case of technology shocks. A modified rule, which reacts not only to bank credit growth but to total credit growth, provides welfare gains in the case of technology shocks. Consequently, macroprudential authorities should consider not only the condition of the banking sector but also the non-banking financial markets.
Finally, I study the impact of the reserve requirement and Liquidity Coverage Ratio (LCR) by extending the framework of Gerali et al. (2010). I find that the effect of the two liquidity requirements on lending and output are relatively similar. However, changing the LCR has consequences on demand for government bonds, and thus different impacts on taxes, household deposits and bank’s profit. I also find that countercyclical liquidity regulations can improve welfare and reduce the volatility of bank loans.