Private and government banks : a DSGE approach

Abstract

This paper studies the role of public banks in a Dynamic Stochastic General Equilibrium (DSGE) model with heterogeneous financial intermediaries. In accordance with the empirical literature on the subject, this study shows that the presence of public banks alter the reaction of the aggregate variables to negative shocks relative to standard DSGE models. Namely, the economy is able to recover faster following negative shocks due to the less pro cyclical behavior of government banks. The paper shows that ignoring this dimension of heterogeneity may render misleading assessments and conclusions regarding economic variables like GDP, consumption, investment, labor, etc.