Vedant Agarwal

This paper examines the effects of deposit insurance in a quantitative macroeconomic model that incorporates the risk of deposit runs faced by banks. During systemic panic episodes, alert uninsured depositors tend to withdraw their funds from banks they perceive as vulnerable. While deposit insurance reduces banks' susceptibility to such runs, it may also weaken their risk management incentives, resulting in a U-shaped relationship between insurance coverage and the risk of bank failure. The model suggests that the welfare-maximizing level of deposit insurance coverage for the U.S. in 2008 closely aligns with the observed level. A moderate increase in coverage may be optimal in contexts of heightened depositor alertness—driven by technological or demographic factors—, greater fiscal capacity or stronger capital requirements.

We analyze whether carbon disclosures can substitute for carbon emission taxation when emissions generate negative externalities. In our setup, climate conscious investors adjust their funding terms based on their beliefs about firms' carbon intensities, which firms can choose to disclose at a cost. In equilibrium, the least carbon-intensive firms disclose and are financed at terms based on their carbon intensity, while non-disclosing firms are financed at more expensive pooling terms. Encouraging disclosuresreduces investment and therefore emissions by non-disclosing firms, but may increase investment and emissions by newly disclosing firms, overall having ambiguous effects on total emissions and social welfare.

We examine optimal accounting rules for computing regulatory capital in a quantitative general equilibrium model with bank defaults. Our framework bifurcates the asset side of banks’ balance sheet into interest rate-sensitive securities and credit-risky loans. Accounting rules determine whether gains or losses on the former class of assets affect regulatory bank capital. We show that when regulatory capital is computed under book value accounting, where unrealized gains or losses are excluded, banks absorb short-term volatility in securities returns, resulting in a smoother credit supply. However, prolonged periods of monetary policy tightening features a higher risk of bank failures, when compared to a regulatory regime based on fair value (or mark-to-market) accounting of banks’ equity. Banks’ responses to interest rate risk under these regimes are asymmetric, depending on whether they have accumulated gains or losses on their securities portfolio. Our welfare analysis suggests that book value capital requirements are superior, with an optimal capital charge of approximately 13%.