TY - JOUR

T1 - Cross-border banking and macroprudential policies in asymmetric monetary unions

AU - Dräger, Lena

AU - Proaño, Christian R.

N1 - Funding Information: We thank the associate editor and two anonymous referees, as well as Zeno Enders, Philipp Engler, Mathias Hoffmann, Angela Abbate, Alexander Meyer-Gohde, Michael Paetz, and Henning Weber for helpful comments and suggestions. The authors also thank Philipp Engler, Federico Signoretti, and Andrea Gerali for sharing their code and Julia Lipp for excellent research assistance. This is a significantly revised version of Dräger and Proaño (2015). Part of this research was conducted while Christian R. Proaño was visiting the Research Centre of the Deutsche Bundesbank, the hospitality of which is gratefully acknowledged. The views expressed in this paper do not necessarily reflect those of the Deutsche Bundesbank. Financial support by the Hans-Böckler Foundation is gratefully acknowledged. Address correspondence to: Lena Dräger, Leibniz Universität Hannover, Königsworther Platz 1, D-30167 Hannover, Germany; e-mail: draeger@gif.uni-hannover.de.

PY - 2020/3/1

Y1 - 2020/3/1

N2 - Against the background of the emergence of macroeconomic imbalances within the European Monetary Union (EMU), we investigate in this paper the macroeconomic consequences of cross-border banking in monetary unions such as the Euro area. For this purpose, we incorporate a union-wide banking sector along the lines in an otherwise standard two-region monetary union DSGE model, accounting for borrowing constraints of entrepreneurs and impatient households and an internal constraint on the bank's leverage ratio. We illustrate in particular how rule-of-thumb lending standards based on the macroeconomic performance of the core region within the monetary union can translate into destabilizing spill-over effects into the other region, resulting in an overall higher macroeconomic volatility. Thereby, we demonstrate a channel through which the financial sector may have exacerbated the emergence of macroeconomic imbalances within the EMU. This effect may be mitigated by macroprudential policies, where especially policies that force the bank's lending standards to be less procyclical prove to be effective in stabilizing output in both regions of the monetary union.

AB - Against the background of the emergence of macroeconomic imbalances within the European Monetary Union (EMU), we investigate in this paper the macroeconomic consequences of cross-border banking in monetary unions such as the Euro area. For this purpose, we incorporate a union-wide banking sector along the lines in an otherwise standard two-region monetary union DSGE model, accounting for borrowing constraints of entrepreneurs and impatient households and an internal constraint on the bank's leverage ratio. We illustrate in particular how rule-of-thumb lending standards based on the macroeconomic performance of the core region within the monetary union can translate into destabilizing spill-over effects into the other region, resulting in an overall higher macroeconomic volatility. Thereby, we demonstrate a channel through which the financial sector may have exacerbated the emergence of macroeconomic imbalances within the EMU. This effect may be mitigated by macroprudential policies, where especially policies that force the bank's lending standards to be less procyclical prove to be effective in stabilizing output in both regions of the monetary union.

KW - Cross-Border Banking

KW - DSGE

KW - Euro Area

KW - Macroprudential Policies

KW - Monetary Unions

UR - http://www.scopus.com/inward/record.url?scp=85049999593&partnerID=8YFLogxK

U2 - 10.1017/S1365100518000214

DO - 10.1017/S1365100518000214

M3 - Article

AN - SCOPUS:85049999593

VL - 24

SP - 255

EP - 290

JO - Macroeconomic Dynamics

JF - Macroeconomic Dynamics

SN - 1365-1005

IS - 2

ER -