Tommaso Gasparini

Tommaso Gasparini

Research and Policy

Working Papers

Imperfect Banking Competition and the Propagation of Uncertainty Shocks

R&R @JME (BdF WP)

Awards: IFABS Best PhD Paper Award (Link most updated version)
Abstract: Uncertainty shocks, by propagating through the banking sector, play a crucial role in driving business cycle fluctuations. To examine how the recent decline in U.S. banking competition has affected the transmission of these shocks, I develop a dynamic stochastic general equilibrium model featuring heterogeneous banks, imperfect banking competition and financial frictions. The model shows that reduced competition in the banking sector leads to higher borrowing rates and increased risk-taking by borrowers. As a result, uncertainty shocks generate more pronounced increases in defaults and sharper contractions in investment and output in less competitive banking environments. Quantitatively, the model implies that the recent decline in U.S. banking competition results in a 0.1 percentage points larger drop in GDP one year after an uncertainty shock. This finding is supported by panel local projection evidence indicating that lower banking competition amplifies the negative impact of uncertainty on GDP.

Risky Firms and Fragile Banks: Implications for Macroprudential Policy

With Vivien Lewis, Stéphane Moyen and Stefania Villa

Reject & Resubmit @JIMF (BdF WP) (BuBa WP) (CEPR WP)

Abstract: Increases in firm default risk raise the default probability of banks while decreasing output and inflation in US data. To rationalize the empirical evidence, we analyse firm risk shocks in a New Keynesian model where entrepreneurs and banks engage in a loan contract and both are subject to default risk. In the model, a wave of corporate defaults leads to losses on banks’ balance sheets; banks respond by selling assets and reducing credit provision. A highly leveraged banking sector exacerbates the contractionary effects of firm defaults. We show that high minimum capital requirements jointly implemented with a countercyclical capital buffer are effective in dampening the adverse consequences of firm risk shocks.

Work in Progress

Capital Requirements, Bank Competition and Stability

Policy


With BdF colleagues


With BdF colleagues