Comments by Bhanupong Nidhiprabha, on Asset-based Reserve Requirements in a Dynamic Stochastic General Equilibrium Model

Bhanupong Nidhiprabha: There have been various attempts to explain the 2008–09 global financial crisis using the concept of credit market friction such as asymmetric information and limited commitment of economic agents. The asymmetric information makes borrowing more costly, even for good borrowers. Financial institutions have difficulty distinguishing creditworthy borrowers from those who are not. The requirement of collateral can somewhat compensate for the lending risks from the inability of economic agent to commit to repaying loans. However, the quantity of loans can be limited by the total value of collareralizable wealth. The authors observe that financial lending is pro-cyclical, rising and falling in line with business cycles. To prevent such situations, the authors propose a capital requirement ratio and sectoral reserve requirement ratio based on the ratio of credit to GDP. If the ratio is higher (lower) than the steady stead credit-to-GDP ratio, the capital and reserve requirement ratio will...