Pablo GARCIA will defend his thesis on "Essays on Macroeconomics and Financial Stability" on Monday, June 4th, 2018 at 10 am, Room MF323 (Manufacture des Tabacs).
Supervisor: Patrick FEVE
Memberships are:
- M. Franck PORTIER, Professor, University College London
- M. Christian HELLWIG, Professor, TSE
- M. Martial DUPAIGNE, Professor, University of Montpellier
- M.Fabrice COLLARD, Professor, University of Berne
Abstract:
The 2008 crisis and the ensuing Great Recession shook the consensus on how to run economic policy. They reminded us that financial imbalances could significantly derail economic activity. In addition, they showed that existing policy tools did not guarantee macro-financial stability; thereby leading to a rethink of monetary policy and financial regulation.
Such a reevaluation has prompted a call for macroprudential tools, i.e., those tools intended for limiting systemic risk and ensuring the resilience of the financial sector. Besides, it has raised new questions about monetary policy and its e?ects on the risk taking behavior of economic agents - the so-called risk taking channel.
A decade from the beginning of the crisis, the contours of a new policy framework for economic and financial stability are still very unclear. Knowledge on which regulatory instruments and how to employ them to curb the buildup of imbalances is limited. Neither is much known about the costs of those instruments. Regulatory intervention constraints some behaviors and distorts the allocation of resources. Consequently, the risk of imposing insidious costs on economic growth must not be underestimated.
Likewise, very little is known about the relationship between monetary policy and the perception and pricing of risk by market participants. Nonetheless, it is natural to think that the monetary policy stance may a?ect the risk taking behavior of economic units, by influencing the attitudes towards risk and the assessment of risks. If so, failure by monetary authorities to consider this phenomenon could exacerbate boom bust patterns.
The aim of this thesis is to explore the path towards macroeconomic and financial stability. I have based my work on the modern dynamic macroeconomic methods and techniques. Specifically, the first essay develops a canonical real business cycle model to assess the macroeconomic consequences of bank capital requirements, arguably the most used prudential tool. The second essay zooms in on the banking sector, and proposes a structural dynamic model with a large number of heterogeneous banks. The model is employed to study the e?ectiveness of interbank exposure limits. Having analyzed regulatory intervention, the last essay uses time series econometrics to shed some light on the risk taking channel of monetary policy.
It is my firm belief that macroeconomics models for financial stability analysis should consider nonlinear patterns such as state dependence, asymmetries and amplification effects. Under unusual conditions like financial booms or credit crunches, economic agents behave di?erently than during normal times. In other words, the inner workings of the macroeconomy become essentially nonlinear under abnormal circumstances.
Therefore, local behavior around the long run equilibrium of the economy is unlikely to contain relevant information about what may happen in exceptional events. In consequence, I study macroeconomic policy exclusively through the lens of nonlinear frameworks and techniques.
Regarding the main results, this thesis makes a strong case in favor of macroprudential regulation. I provide clear evidence suggesting that regulatory intervention can be a powerful tool to strengthen financial resilience, reduce economic volatility and smooth business cycles. In addition, this thesis shows that accommodative monetary policy can produce overconfidence among market participants; thereby increasing risk taking and contributing to the buildup of imbalances. In other words, it provides empirical evidence for the existence of a risk taking channel of monetary policy.
