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Macroeconomic Propagation under Different Regulatory Regimes: Evidence from an Estimated DSGE Model for the Euro Area

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Listed:
  • Matthieu Darracq Pariès

    (European Central Bank)

  • Christoffer Kok Sørensen

    (European Central Bank)

  • Diego Rodriguez-Palenzuela

    (European Central Bank)

Abstract

This article analyzes the role of credit market frictions in business-cycle fluctuations and in the transmission of monetary policy. We estimate a closed-economy dynamic stochastic general equilibrium (DSGE) model for the euro area with financially constrained households and firms and embedding an oligopolistic banking sector facing capital constraints. Using this setup we examine the monetary policy implications of the various financial frictions to credit supply and demand and furthermore examine the real economic implications of increasing capital requirements and of introducing risk-sensitive capital requirements. Moreover, the potential for introducing countercyclical bank capital rules and aligning macroprudential tools with standard monetary policy tools is examined. In particular, the model results highlight the importance of operating with a protracted implementation schedule of new regulatory requirements for smoothing out the transitional costs to the economy arising from a more capital-constrained banking sector.

Suggested Citation

  • Matthieu Darracq Pariès & Christoffer Kok Sørensen & Diego Rodriguez-Palenzuela, 2011. "Macroeconomic Propagation under Different Regulatory Regimes: Evidence from an Estimated DSGE Model for the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 49-113, December.
  • Handle: RePEc:ijc:ijcjou:y:2011:q:4:a:3
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    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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