Slow recoveries, endogenous growth and macro-prudential policy

Financial crises have severe short and long-term consequences. We develop a general equilibrium model with financial frictions and endogenous growth in which macro-prudential policy supports economic activity and productivity growth by strengthening the resilience of financial intermediaries to adverse shocks. The improved intermediation capacity of a safer financial system leads to a higher steady-state growth rate. The optimal capital ratio increases welfare by 8%, one order of magnitude more than in the case without endogenous growth.