JobMarket Seminar

Diogo Lima

Indiana University


Seminar 2 – 14:30


What is the role of macroprudential regulation as a policy tool to improve financial stability? We use the Lehman collapse as a natural experiment to document the role of the banking system as a transmission channel of global financial disturbances to domestic economies. Using granular and confidential data we show that domestic firms respond to foreign exogenous shocks by cutting investment by 14% and employment by 2.3%. We also model an open-economy with a banking sector to examine the role of macroprudential regulation. Our results suggest that imposing countercyclical capital requirements on the banking sector during a financial crisis result in: (i) 5 p.p. smaller drop of gross domestic product and (ii) a fall in investment reduced by 3 p.p.. We document that imposing capital requirements entails a trade-off between lower volatility and lower economic activity. We also find that countercyclical capital requirements can be welfare improving, but only under specific economic conditions. Periods of economic recession or states of low aggregate credit are necessary conditions for macro-prudential regulation to be welfare improving.

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