I recently read the article Financial Business Cycles by Iacoviello (2014). In the third paragraph of chapter 2.4on page 10, the author mentions: When the capital adequacy constraint becomes tighter,the banker’s multiplier on the borrowing constraint λB,t gets higher. Since I am still a beginner, it is difficult for me to see directly from the formula given by him how the change of the Lagrange multiplier is affected by these variables and shocks. Can anyone tell me the basis on which the author puts forward this conclusion?
Thanks a lot!
I am not sure I get the point. The Lagrange multiplier on a constraint by construction increases when a constraint becomes tighter (the Lagrange multiplier measures the change in the objective when the constraint tightness marginally changes). It does not matter what the cause of the increasing tightness is to get this result.