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Risk Sharing, Macro-Prudential Policy and Welfare in an Overlapping Generations Model (OLG) Economy

Author

Listed:
  • Amira Hakim
  • Eleftherios Thalassinos

Abstract

Purpose: The general purpose of this research was to examine the impact of banking regulation on risk sharing and welfare in an Overlapping Generations model economy. Design/Methodology/Approach: The study uses a stochastic Overlapping Generation model with banking, limited liability, and deposit insurance, examining how the banking regulation affects welfare with the introduction of the principle of risk sharing in the economy. Findings: The results indicated support on previous studies and demonstrated that, using data from Turkey, banking regulation may lead to a welfare loss, a positive effect of optimal regulation on social welfare. Practical implications: The main results show that the trade-off between risk sharing, and financial stabilization depends on the level of capital requirements, and the risk sharing behavior of the economy. The risk sharing model for both specifications (risky and safe) confirm that the introduction of behavior of risk sharing on the economy has a positive impact on the welfare. Originality/value: This model allows us to evaluate quantitatively the key trade-off of risk sharing banking regulation and social welfare.

Suggested Citation

  • Amira Hakim & Eleftherios Thalassinos, 2021. "Risk Sharing, Macro-Prudential Policy and Welfare in an Overlapping Generations Model (OLG) Economy," European Research Studies Journal, European Research Studies Journal, vol. 0(4B), pages 585-611.
    • Handle: RePEc:ers:journl:v:xxiv:y:2021:i:4b:p:585-611
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    References listed on IDEAS

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    More about this item

    Keywords

    Risk sharing; welfare; macro-prudential policy; capital requirements.;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D6 - Microeconomics - - Welfare Economics

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