INSIGHTS ON THE GREEK ECONOMY FROM THE 3D MACRO MODEL
Hiona Balfoussia
Bank of Greece
Dimitris Papageorgiou
Bank of Greece
ABSTRACT
This paper examines the macroeconomic and welfare implications of banking capital requirement policies and their interactions with real and financial shocks for the Greek economy. The model employed is that of Clerc et al. (2015), a DSGE model featuring a detailed financial sector, banking capital regulations and bank default in equilibrium. The key model implication is that capital requirements reduce bank leverage and the default risk of banks but their relationship with social welfare is hump-shaped, reflecting a trade-off. The model is calibrated to data on the Greek economy and the dynamic responses to a number of financial and real shocks which may have played a material role in the unfolding of the Greek crisis are explored. The results indicate inter alia that an increase in the depositors’ cost of bank default leads to a substantial increase in the deposit rate, a decline in deposits and bank equity and an increase in bank fragility, while on the real side of the economy the decline in total credit prompts a deterioration of key macro variables. Additionally, the results imply that while recapitalizations increase bank net worth and credit supply and boost economic activity, this potential benefit is severely compromised in a high financial distress scenario, as the positive real and financial implications of a recapitalization become both smaller and more short-lived.
Keywords: Macroprudential Policy, General Equilibrium, Greece.
JEL classification: E3, E44, G01, G21, O52.
Acknowledgements: We would like to thank Alexandros Vardoulakis for providing the Matlab codes for this project and for his valuable advice and feedback. We would also like to thank Harris Dellas, Heather Gibson and Dimitris Malliaropulos for useful comments and suggestions. Helpful comments by seminar participants at the Bank of Greece and the 2nd Policy Research Conference of the European Central Banking Network (ECBN) on Macroprudential Instruments and Financial Cycles are greatly appreciated. The views expressed in this paper are those of the authors and not necessarily those of the Bank of Greece, the ECB or the Eurosystem.
Correspondence:
Hiona Balfoussia
Bank of Greece
Economic Analysis and Research Department
Bank of Greece
21 E. Venizelos Ave, Athens 10250
email: hbalfoussia@bankofgreece.gr