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Macroprudential policy with convertible debt

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  • Hollander, Hylton

Abstract

This paper studies the effectiveness of countercyclical capital requirements and contingent convertible capital (CoCos) in limiting financial instability, and its associated influence on the real economy. To do this, I augment both features into a standard business cycle framework with an equity market and a banking sector. The model is calibrated to real U.S. data and used for simulations. The findings suggest that a countercyclical capital adequacy rule and CoCos provide an effective dual approach to macroprudential policy. On the one hand, a capital adequacy rule mitigates the build-up of systemic risk through a capital buffer. On the other hand, CoCos are able to reduce the impact of a sudden decline in bank capital.

Suggested Citation

  • Hollander, Hylton, 2017. "Macroprudential policy with convertible debt," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 285-305.
  • Handle: RePEc:eee:jmacro:v:54:y:2017:i:pb:p:285-305
    DOI: 10.1016/j.jmacro.2017.07.003
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    2. Philippe Oster, 2020. "Contingent Convertible bond literature review: making everything and nothing possible?," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(4), pages 343-381, December.

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    More about this item

    Keywords

    Contingent convertible debt; Bank capital; Bank regulation; Basel; DSGE;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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