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CROSS-BORDER BANKING AND MACROPRUDENTIAL POLICIES IN ASYMMETRIC MONETARY UNIONS

Published online by Cambridge University Press:  17 July 2018

Lena Dräger  and
Christian R. Proaño
Lena Dräger*
Affiliation:
Leibniz Universität Hannover
Christian R. Proaño
Affiliation:
Otto-Friedrich-Universität Bamberg and Universidad San Francisco de Quito
*
Address correspondence to: Lena Dräger, Leibniz Universität Hannover, Königsworther Platz 1, D-30167Hannover, Germany; e-mail: draeger@gif.uni-hannover.de.
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Abstract

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.

Keywords

Cross-Border BankingEuro AreaMonetary UnionsDSGEMacroprudential Policies
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 2 , March 2020 , pp. 255 - 290
Copyright
© Cambridge University Press 2018

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Footnotes

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.

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