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GDP at risk in a DSGE model: an application to banking sector stress testing

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Author Info
Jokivuolle, Esa () (Bank of Finland Research)
Kilponen , Juha () (Bank of Finland Research)
Kuusi, Tero () (Helsinki School of Economics)

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Abstract

We suggest a complementary tool for financial stability analysis based on stochastic simulation of a dynamic stochastic general equilibrium model (DSGE) of the macro economy. The paper relates to financial stability research in which financial aggregates crucial to financial stability are modelled as functions of macroeconomic variables. In these models, stress tests for eg banking sector loan losses can be generated by considering adverse scenarios of macro variables. A DSGE model provides a systematic way of generating coherent macro scenarios which can be given a rigorous economic interpretation. The approach is illustrated using a DSGE model of the Finnish economy and a simple model of Finnish banking sector loan losses.

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Publisher Info
Paper provided by Bank of Finland in its series Research Discussion Papers with number 26/2007.

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Length: 27 pages
Date of creation: 19 Dec 2007
Date of revision:
Handle: RePEc:hhs:bofrdp:2007_026

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.bof.fi/en/tutkimus
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Related research
Keywords: DSGE models; financial stability; loan losses; stress testing;

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Find related papers by JEL classification:
E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Mayes, David G & Nieto, Maria J & Wall , Larry, 2007. "Multiple safety net regulators and agency problems in the EU: is Prompt Corrective Action a partial solution?," Research Discussion Papers 7/2007, Bank of Finland. [Downloadable!]
  2. Bask, Mikael, 2007. "Optimal monetary policy in a hybrid New Keynesian model with a cost channel," Research Discussion Papers 24/2007, Bank of Finland. [Downloadable!]
  3. Kilponen , Juha & Santavirta, Torsten, 2007. "When do R&D subsidies boost innovation? Revisiting the inverted U-shape," Research Discussion Papers 10/2007, Bank of Finland. [Downloadable!]
  4. Goderis, Benedikt & Marsh, Ian & Vall Castello , Judit & Wagner, Wolf, 2007. "Bank behaviour with access to credit risk transfer markets," Research Discussion Papers 4/2007, Bank of Finland. [Downloadable!]
    Other versions:
  5. Bask, Mikael, 2007. "Measuring potential market risk," Research Discussion Papers 20/2007, Bank of Finland. [Downloadable!]
  6. Bask, Mikael, 2007. "Optimal monetary policy under heterogeneity in currency trade," Research Discussion Papers 21/2007, Bank of Finland. [Downloadable!]
  7. Ravenna , Federico & Seppälä, Juha, 2007. "Monetary policy, expected inflation and inflation risk premia," Research Discussion Papers 18/2007, Bank of Finland. [Downloadable!]
  8. Bask, Mikael & Selander, Carina, 2007. "Robust Taylor rules in an open economy with heterogeneous expectations and least squares learning," Research Discussion Papers 6/2007, Bank of Finland. [Downloadable!]
  9. Bask, Mikael, 2007. "Instrument rules in monetary policy under heterogeneity in currency trade," Research Discussion Papers 22/2007, Bank of Finland. [Downloadable!]
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  10. Bask, Mikael, 2007. "Long swings and chaos in the exchange rate in a DSGE model with a Taylor rule," Research Discussion Papers 19/2007, Bank of Finland. [Downloadable!]
  11. Kilponen, Juha & Leitemo, Kai, 2007. "Discretion and the transmission lags of monetary policy," Research Discussion Papers 8/2007, Bank of Finland. [Downloadable!]
  12. Bask, Mikael, 2007. "A case for interest rate smoothing," Research Discussion Papers 25/2007, Bank of Finland. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Tervala, Juha, 2007. "The international transmission of monetary policy in a dollar pricing model," Research Discussion Papers 29/2007, Bank of Finland. [Downloadable!]
  2. Tovar, Camilo Ernesto, 2009. "DSGE Models and Central Banks," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(16), pages 1-31. [Downloadable!]
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