a1 The Vanguard Group
a2 LeBow College of Business
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.
c1 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: email@example.com.
We thank participants at the 2009 Latin American Meetings of the Econometric Society for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect those of The Vanguard Group, Inc.