Essays on Financial Accelerators and Macroprudential Policy

This thesis focuses on the relationship between the real economy and the financial sector which gives rise to various amplification mechanisms known as financial accelerators. Historically, those channels are known to be in the roots of the world's largest crises such as the 2008 Great Recession. In its aftermath, policy-makers have undertaken various reforms that introduce macroprudential policy which focuses on the stability of the financial system as a whole. This thesis studies different financial amplification channels and the ability of macroprudential policy to mitigate their impact on the real economy in three chapters. The first chapter introduces different macroprudential tools into a macroeconomic framework with financial frictions and analyses their ability to mitigate the impact of a crisis originating from the financial sector to the real economy. The main finding of the paper is that sector specific tools can be effective if applied before the occurrence of the crisis, however, broader tools are much more effective once the crisis has spread to the economy. The second chapter expands the framework of the previous one, in order to provide a realistic representation of the current regulatory setting for capital requirements - the Internal Rating Based approach. The paper then studies the ability of the regulation to lead to procyclical capital requirements and thus amplify the business cycle and reduce social welfare. In order to avoid these consequences, an alternative policy rule is proposed which is able to mitigate the amplification effects. The third chapter focuses on the founding theory behind the current regulatory framework - the portfolio loss distribution (Vasicek, 2002) and expands it by introducing macroeconomic amplification mechanisms known as financial accelerators. The resulting portfolio distribution shows large losses to be substantially more likely which increases the fragility of the financial system and the amount of capital necessary to maintain its stability.