《2 Macroeconomic Effects of the Interest Rate Level》.pdf

2 Macroeconomic Effects of the Interest Rate Level: Growth and Fluctuations in an Economy with Bank Capital Adequacy Standards Gianfranco Giulioni Department of Quantitative Methods and Economic Theory, University of Chieti-Pescara, Italy g.giulioni@unich.it 2.1 Introduction A large part of the macroeconomic literature is dedicated to identifying the determinants of two phenomena: the growth and fluctuations of the aggregate output. Among the proposed explanations, the one concern- ing financial factors (see Gertler, 1988, for a survey) is that adopted in this study. Our goal is to investigate how the interest rate affects the growth rate and fluctuations (represented by the growth volatility) of the econ- omy when the banking sector matters. 1 Intermediaries and especially the banking sector have been the object of increasing interest in recent years, because it could be the cause of serious crisis due to the interac- tions on the interbank market and the consequent contagion effect of an eventual bank failure. In real life, the importance of bank’s finan- cial soundness was recognized by the Basel accords (Basel Committee, 2003, 1998) that impose a minimum capitalization level on banks.2 As we’ll see shortly this is a basic ingredient of the model presented in this paper. The paper is organized as follows. After this introduction, the agents and their behavior are presented and discussed in section 2.2. In sec- 1 The literature on this topic is wide. As examples one can see Levine (1997) for a survey on financial development and growth; Greenwald and Stiglitz (1993) for a theoretical model on financial markets imperfections and business cycles, and Beck et al. (2006) for an empirical paper on financial intermediary development and growth volatility. 2 The relationship between adequate capital ratios and bank failure is analyzed by Estrella et al. (2000). 18 Gianfranco Gi