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DO BANK CAPITAL REQUIREMENTS AMPLIFY BUSINESS CYCLES? BRIDGING THE GAP BETWEEN THEORY AND EMPIRICS

Published online by Cambridge University Press:  16 March 2011

Roger Aliaga-Díaz  and
María Pía Olivero
Roger Aliaga-Díaz
Affiliation:
The Vanguard Group
María Pía Olivero*
Affiliation:
LeBow College of Business
*
Address correspondence to: María Pía Olivero, Department of Economics, LeBow College of Business, Drexel University, 503-A Matheson Hall, 3141 Chestnut St., Philadelphia, PA 19104, USA; e-mail: maria.olivero@drexel.edu.
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Abstract

In this paper we study the role of bank capital adequacy requirements in the transmission of aggregate productivity shocks. We identify a gap between the empirical and the theoretical work that studies the “credit crunch” effects of these requirements, and how they can work as a financial accelerator that amplifies business cycles. This gap arises because the empirical work faces some difficulties in identifying the effects of capital requirements, whereas the theory still lacks a structural framework that can address these difficulties. We bridge that gap by providing a general equilibrium theoretical framework that allows us to study this financial accelerator. The main insight we obtain is that the “credit crunch” and financial accelerator effects are rather weak, which confirms the findings of existing empirical work. Additionally, by developing a structural framework, we are able to provide an explanation for this result.

Keywords

Credit CrunchBusiness CyclesCapital Adequacy Requirements
Type
Articles
Information
Macroeconomic Dynamics , Volume 16 , Issue 3 , June 2012 , pp. 358 - 395
Copyright
Copyright © Cambridge University Press 2011

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