Title: Cross-border banking and macroprudential policies in asymmetric monetary unions
Authors: Lena Draeger - Johannes Gutenberg-University of Mainz (Germany)
Christian Proano - University of Bamberg (Germany) [presenting]
Abstract: Against the background of the emergence of macroeconomic imbalances within the European Monetary Union (EMU), we investigate 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 previous 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 both output in the regions of the monetary union and the leverage ratio of the financial sector.