The long-run effects of risk: an equilibrium approach
Autor(a) principal: | |
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Data de Publicação: | 2023 |
Outros Autores: | , |
Tipo de documento: | Artigo |
Idioma: | eng |
Título da fonte: | Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
Texto Completo: | http://hdl.handle.net/10451/61471 |
Resumo: | Advanced economies tend to have large financial sectors which can be vulnerable to crises. We employ a DSGE model with banks featuring limited liability to investigate how risk shocks in the financial sector affect long-run macroeconomic outcomes. With full deposit insurance, banks expand balance sheets when risk increases, leading to higher investment and output. With no deposit insurance, we observe substantial drops in long-run credit provision, investment, and output. Reducing moral hazard by lowering the fraction of reimbursed deposits in case of bank default increases the probability of bank default in equilibrium. The long-run probability of bank default under a regime with no deposit insurance is more than 50% higher than under a regime with full deposit insurance for high levels of risk. These differences provide a novel argument in favor of deposit insurance. Our welfare analysis finds that increased risk always reduces welfare, except when there is full deposit insurance and deadweight costs from default are small. |
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The long-run effects of risk: an equilibrium approachAdvanced economies tend to have large financial sectors which can be vulnerable to crises. We employ a DSGE model with banks featuring limited liability to investigate how risk shocks in the financial sector affect long-run macroeconomic outcomes. With full deposit insurance, banks expand balance sheets when risk increases, leading to higher investment and output. With no deposit insurance, we observe substantial drops in long-run credit provision, investment, and output. Reducing moral hazard by lowering the fraction of reimbursed deposits in case of bank default increases the probability of bank default in equilibrium. The long-run probability of bank default under a regime with no deposit insurance is more than 50% higher than under a regime with full deposit insurance for high levels of risk. These differences provide a novel argument in favor of deposit insurance. Our welfare analysis finds that increased risk always reduces welfare, except when there is full deposit insurance and deadweight costs from default are small.ElsevierRepositório da Universidade de LisboaVan Der Kwaak, ChristiaanMadeira, JoaoPalma, Nuno2023-12-21T10:51:35Z20232023-01-01T00:00:00Zinfo:eu-repo/semantics/publishedVersioninfo:eu-repo/semantics/articleapplication/pdfhttp://hdl.handle.net/10451/61471engvan der Kwaak, C., Madeira, J., Palma, N. (2023). The long-run effects of risk: an equilibrium approach. European Economic Review, Vol. 153, 1043750014-292110.1016/j.euroecorev.2023.104375info:eu-repo/semantics/openAccessreponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãoinstacron:RCAAP2023-12-25T01:18:46Zoai:repositorio.ul.pt:10451/61471Portal AgregadorONGhttps://www.rcaap.pt/oai/openaireopendoar:71602024-03-20T00:56:07.527783Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãofalse |
dc.title.none.fl_str_mv |
The long-run effects of risk: an equilibrium approach |
title |
The long-run effects of risk: an equilibrium approach |
spellingShingle |
The long-run effects of risk: an equilibrium approach Van Der Kwaak, Christiaan |
title_short |
The long-run effects of risk: an equilibrium approach |
title_full |
The long-run effects of risk: an equilibrium approach |
title_fullStr |
The long-run effects of risk: an equilibrium approach |
title_full_unstemmed |
The long-run effects of risk: an equilibrium approach |
title_sort |
The long-run effects of risk: an equilibrium approach |
author |
Van Der Kwaak, Christiaan |
author_facet |
Van Der Kwaak, Christiaan Madeira, Joao Palma, Nuno |
author_role |
author |
author2 |
Madeira, Joao Palma, Nuno |
author2_role |
author author |
dc.contributor.none.fl_str_mv |
Repositório da Universidade de Lisboa |
dc.contributor.author.fl_str_mv |
Van Der Kwaak, Christiaan Madeira, Joao Palma, Nuno |
description |
Advanced economies tend to have large financial sectors which can be vulnerable to crises. We employ a DSGE model with banks featuring limited liability to investigate how risk shocks in the financial sector affect long-run macroeconomic outcomes. With full deposit insurance, banks expand balance sheets when risk increases, leading to higher investment and output. With no deposit insurance, we observe substantial drops in long-run credit provision, investment, and output. Reducing moral hazard by lowering the fraction of reimbursed deposits in case of bank default increases the probability of bank default in equilibrium. The long-run probability of bank default under a regime with no deposit insurance is more than 50% higher than under a regime with full deposit insurance for high levels of risk. These differences provide a novel argument in favor of deposit insurance. Our welfare analysis finds that increased risk always reduces welfare, except when there is full deposit insurance and deadweight costs from default are small. |
publishDate |
2023 |
dc.date.none.fl_str_mv |
2023-12-21T10:51:35Z 2023 2023-01-01T00:00:00Z |
dc.type.status.fl_str_mv |
info:eu-repo/semantics/publishedVersion |
dc.type.driver.fl_str_mv |
info:eu-repo/semantics/article |
format |
article |
status_str |
publishedVersion |
dc.identifier.uri.fl_str_mv |
http://hdl.handle.net/10451/61471 |
url |
http://hdl.handle.net/10451/61471 |
dc.language.iso.fl_str_mv |
eng |
language |
eng |
dc.relation.none.fl_str_mv |
van der Kwaak, C., Madeira, J., Palma, N. (2023). The long-run effects of risk: an equilibrium approach. European Economic Review, Vol. 153, 104375 0014-2921 10.1016/j.euroecorev.2023.104375 |
dc.rights.driver.fl_str_mv |
info:eu-repo/semantics/openAccess |
eu_rights_str_mv |
openAccess |
dc.format.none.fl_str_mv |
application/pdf |
dc.publisher.none.fl_str_mv |
Elsevier |
publisher.none.fl_str_mv |
Elsevier |
dc.source.none.fl_str_mv |
reponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação instacron:RCAAP |
instname_str |
Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
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RCAAP |
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RCAAP |
reponame_str |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
collection |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
repository.name.fl_str_mv |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
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