Research Project funded by the European Union through a Marie-Curie Career Integration Grant

The stability of the banking sector is at the top of international policy agendas. The ongoing worldwide financial crisis has shown that monetary-policy interventions alone are not sufficient to resolve banking crises. It is unclear how a banking sector can be stabilised and protected against large losses. Policy makers in Europe and elsewhere have repeatedly intervened with new policy measures such as liquidity provisions, quantitative easing, nationalisations, and various other subsidies. These policy measures are to a large extent untested and their effectiveness is unknown.

While the microeconomics of banking is well understood, a macroeconomic framework that allows for a systemic perspective on banking systems is not established. In particular, dynamic models allowing for an investigation of the systemic risks arising from a banking system are missing. Thus, there is no a theoretical foundation for modern crisis intervention policies.

MACROBANK develops a novel class of analytically tractable dynamic macroeconomic models in which a competitive banking sector is incorporated. The project aims at providing a theoretical foundation for policy makers to identify structural causes for banking crises and to assess the effectiveness of possible crisis intervention policies. Key objectives of intervention policies include the reduction of public debt, the control of inflation and deflation, and on how central bank activities can be restored to pre-crisis levels. The effectiveness of crisis intervention policies is analysed and tested with the help of computer simulations for which all necessary software tools are developed.