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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)

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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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0726netti.pdf
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Bibliographic 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.suomenpankki.fi/en/
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Keywords: DSGE models; financial stability; loan losses; stress testing;

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References

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  1. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  2. Chirinko, Robert S. & Guill, Gene D., 1991. "A framework for assessing credit risk in depository institutions: Toward regulatory reform," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 785-804, September.
  3. Pesola, Jarmo, 2001. "The role of macroeconomic shocks in banking crises," Research Discussion Papers 6/2001, Bank of Finland.
  4. repec:fth:bfdipa:6/2001 is not listed on IDEAS
  5. Glenn Hoggarth & Andrew Logan & Lea Zicchino, 2005. "Macro stress tests of UK banks," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 392-408 Bank for International Settlements.
  6. Kilponen , Juha & Kinnunen , Helvi & Ripatti , Antti, 2006. "Population ageing in a small open economy – some policy experiments with a tractable general equilibrium model," Research Discussion Papers 28/2006, Bank of Finland.
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Cited by:
  1. 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.
  2. Daphne Nicolitsas, 2011. "On-the-job training in Greece: a brief overview," Economic Bulletin, Bank of Greece, Economic Research Department, issue 35, pages 47-76, June.
  3. Faidon Kalfaoglou, 2011. "The usefulness of stress testing exercise for assessing the soundness of the banking system," Economic Bulletin, Bank of Greece, Economic Research Department, issue 35, pages 25-46, June.
  4. Vasilios Manesiotis, 2011. "Numerical fiscal rules in practice," Economic Bulletin, Bank of Greece, Economic Research Department, issue 35, pages 7-13, June.
  5. Melina Varsadani, 2011. "Tax evasion in Greece: an overview," Economic Bulletin, Bank of Greece, Economic Research Department, issue 35, pages 15-24, June.

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