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We incorporate banks into a DSGE framework to study how interest
rate hikes affect the macroeconomy. The procyclical bank
balance sheets and long-term bond prices amplify adverse shocks,
which can trigger a bank run. We introduce a macroprudential
policy that can mitigate or prevent banking crises: an ex-ante permanent
tax on bank holdings of long-term government bonds and
reducing the tax rate in response to interest rate hikes. By contrast,
subsidizing bank holdings of long-term investment bonds improves
welfare when capital producers face loan-in-advance constraints.
