Template-Type: ReDIF-Paper 1.0
Author-Name: William John Tayler
Author-Name-First: William John
Author-Name-Last: Tayler
Author-Name: Roy Zilberman
Author-Name-First: Roy
Author-Name-Last: Zilberman
Title: Financial Shocks, Loan Loss Provisions and Macroeconomic Stability
Abstract: This paper studies the interactions between loan loss provisions, business cycles and monetary policy in a New Keynesian model featuring a credit cost channel and endogenous credit default risk. We show that an incurred-loss specific provisioning system induces financial accelerator mechanisms, and generates financial, price and macroeconomic instability. Dynamic provisioning regimes, covering for expected losses over the whole business cycle, significantly improve welfare, and furthermore moderate the (otherwise optimal) anti-inflationary stance in the monetary policy rule. Optimal policy in response to financial shocks calls for a combination of macroprudential dynamic provisioning and conventional monetary policy rules, which exclude financial stability targets.
Creation-Date: 2014
File-URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/TaylerZilberman_LLP_JAN_2018_.pdf
File-Format: application/pdf
Number: 124138133
Classification-JEL: E32, E44, E52, E58, G28
Keywords: Basel III - Macroprudential Policy, Dynamic Provisions, Borrowing Cost Channel, Monetary Policy, Welfare
Handle: RePEc:lan:wpaper:124138133