Essays on role of banks on economic gaps between borrowers and savers

Abstract

This thesis presents three chapters that empirically investigate role of banks on wage and wealth gaps between heterogeneous households using DSGE models. The first chapter analyses the role of an endogenous human capital accumulation channel and solvent banks (demand side of the credit market only) on wage gap. We find that the TFP shock reduces wage and income gaps, whereas preferences or financial shocks increase wage and welfare gaps. The welfare gap will be reduced under a human capital shock, whereas wage gap will only be reduced in the short-run. Our findings also suggest that the presence of lending facilities mitigates the propagation mechanism of the shocks to wage and welfare gaps, whereas the human capital accumulation channel mainly improves the welfare of borrowers and significantly affects wage and wealth gaps. Robustness checks show that our key results remain valid. The second chapter examines wage and wealth gaps under the presence of an imperfect banking competition, as it allows to study both supply and demand sides of the credit market. The findings show that under the TFP shock, wage gap declines, while it widens under housing preference and human capital transformation shocks. Moreover, under the LTV shock, wage gap shrinks in the short-run only. Robustness checks provide consistent results with the base model. However, testing different modelling assumptions show that there is a lower deviation in wage gap under a higher bank capital adjustment cost. Finally, the third chapter studies the effects of an insolvent banking sector on skill premium with the presence of a skill accumulation channel. We find that under the TFP shock, a shock to skill transformation and a shock to diversion of assets skill premium reduces. We also find that under the TFP shock, the bank capital declines, but it increases under the other three shocks. The shock to the probability of the number of exiting banks increases skill premium due to higher supply of unskilled labour and lower wages for these workers. Robustness checks are consistent with the base model.