Author: Jianjun Miao, Zhouxiang Shen, Dongling Su

Abstract

We incorporate banks into a DSGE framework to study how interest rate hikes affect the macroeconomy. The procyclical bank balance sheets and long-term bond prices amplify adverse shocks, which can trigger a bank run. We introduce a macroprudential policy that can mitigate or prevent banking crises: an ex-ante permanent tax on bank holdings of long-term government bonds and reducing the tax rate in response to interest rate hikes. By contrast, subsidizing bank holdings of long-term investment bonds improves welfare when capital producers face loan-in-advance constraints.

Links: https://www.aeaweb.org/articles?id=10.1257/mac.20240018