Staff Working Paper No. 1,156
By Manuel Gloria and Chiara Punzo
We develop a DSGE model that incorporates state-dependent commercial bank capital requirements as a source of non-linearity. The presence of non-bank financial institutions (NBFI) amplifies the contractionary effects of monetary policy, primarily through the asset price channel. The amplification effect is strongest in the left tail of the GDP distribution and remains pronounced under zero lower bound conditions. The short-run vulnerabilities exposed by NBFIs contrast with their long-run benefits: a greater share of NBFI lending is associated with higher welfare.
Monetary policy, state-dependent bank capital requirements and the role of non-bank financial intermediaries