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

Amira Hakim, Eleftherios Thalassinos
European Research Studies Journal, Volume XXIV, Issue 4B, 585-611, 2021
DOI: 10.35808/ersj/2677


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.

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