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Traditional and matter-of-fact financial frictions in a DSGE model for Brazil: the role of macroprudential instruments and monetary policy

Author

Listed:
  • Fabia Carvalho
  • Fabia A. de Carvalho
  • Silvio Michael de Azevedo Costa
  • Marcos Ribeiro de Castro

Abstract

This paper builds a DSGE model in which future wage assignments are introduced as collateral for risky consumer and housing loans, in addition to standard BGG-type loans to entrepreneurs. Banks face matter-of-fact constraints in funding and lending markets, have liquidity targets, and are subject to a number of macroprudential rules, such as reserve requirements, capital requirements, and regulation on housing loan concessions. The main determinants of actual bank lending spreads are mapped into the model through the introduction of taxes on banking activity, monopolistic competition in a segment of the bank's conglomerate, credit risk, and regulatory and operational costs. The bank operates in the open market, and that is key to the transmission channel of reserve requirements. The model is carefully tailored to Brazil and reproduces the baseline understanding of the transmission channel of monetary policy and of reserve requirements. Macroprudential regulation in the form of capital requirements has important implications for the dynamics of real variables. DSGE modeling, with results analyzed trhough impulse responses. The first draft of the paper presents a calibration and IRFs. We plan to present in the conference a full-fledged estimated version of it, with variance decomposition analysis, historical decomposition of shocks, in addition to scenario studies. Preliminary results with the calibrated version of the model show that our modeling strategy is capable of reproducing the baseline understanding of the transmission channel of monetary policy and of reserve requirements. In addition, macroprudential regulation in the form of capital requirements has important implications for the dynamics of real variables. We also plan to study to effect of changes in risk weights in capital requirements, changes in the remuneration of reserve requirements, and also analyze the transmission of the last financial shock through the eyes of the model.

Suggested Citation

  • Fabia Carvalho & Fabia A. de Carvalho & Silvio Michael de Azevedo Costa & Marcos Ribeiro de Castro, 2013. "Traditional and matter-of-fact financial frictions in a DSGE model for Brazil: the role of macroprudential instruments and monetary policy," EcoMod2013 5145, EcoMod.
    • Handle: RePEc:ekd:004912:5145
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    Cited by:

    1. Anna Grodecka, 2020. "On the Effectiveness of Loan‐to‐Value Regulation in a Multiconstraint Framework," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(5), pages 1231-1270, August.
    2. Dürmeier, Stefan, 2022. "A model of quantitative easing at the zero lower bound," BERG Working Paper Series 183, Bamberg University, Bamberg Economic Research Group.
    3. Primus, Keyra, 2017. "Excess reserves, monetary policy and financial volatility," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 153-168.
    4. Fabia A. de Carvalho & Marcos R. Castro, 2015. "Foreign Capital Flows, Credit Growth and Macroprudential Policy in a DSGE Model with Traditional and Matter-of-Fact Financial Frictions," Working Papers Series 387, Central Bank of Brazil, Research Department.
    5. Bank for International Settlements, 2016. "Experiences with the ex ante appraisal of macroprudential instruments," CGFS Papers, Bank for International Settlements, number 56, december.
    6. Arruda Gustavo & Lima Daniela & Teles Vladimir Kühl, 2020. "Household borrowing constraints and monetary policy in emerging economies," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(1), pages 1-21, January.
    7. Georgiadis, Georgios & Jančoková, Martina, 2020. "Financial globalisation, monetary policy spillovers and macro-modelling: Tales from 1001 shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 121(C).
    8. Leonardo Nogueira Ferreira & Márcio Issao Nakane, 2018. "Macroprudential policy in a DSGE model: anchoring the countercyclical capital buffer," Economics Bulletin, AccessEcon, vol. 38(4), pages 2345-2352.
    9. Carlos Viana de Carvalho & Eduardo Zilberman & Laura Candido de Souza & Nilda Mercedes Cabrera Pasca, 2014. "Macroeconomic Effects of Credit Deepening in Latin America," Textos para discussão 629, Department of Economics PUC-Rio (Brazil).
    10. Marcos R. Castro, 2019. "Sectoral Countercyclical Buffers in a DSGE Model with a Banking Sector," Working Papers Series 503, Central Bank of Brazil, Research Department.
    11. Agénor, Pierre-Richard & Alper, Koray & Pereira da Silva, Luiz, 2018. "External shocks, financial volatility and reserve requirements in an open economy," Journal of International Money and Finance, Elsevier, vol. 83(C), pages 23-43.
    12. Anna Grodecka, 2017. "On the (in)effectiveness of LTV regulation in a multiconstraint framework," EcoMod2017 10529, EcoMod.
    13. Pedro Lutz Ramos & Marcelo Savino Portugal, 2016. "Choques Antecipados De Política Monetária, Forward Guidance E Políticas De Estabilização Macroeconômicas," Anais do XLIII Encontro Nacional de Economia [Proceedings of the 43rd Brazilian Economics Meeting] 043, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    14. Carlos Carvalho & Nilda Pasca & Laura Souza & Eduardo Zilberman, 2023. "Macroeconomic Effects of Credit Deepening in Latin America," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(7), pages 1817-1855, October.
    15. Horacio A. Aguirre & Emilio F. Blanco, 2015. "Credit and Macroprudential Policy in an Emerging Economy: a Structural Model Assessment," BIS Working Papers 504, Bank for International Settlements.
    16. Rodríguez, Aldo, 2020. "Estimación Bayesiana de un Modelo de Economía Abierta con Sector Bancario," Dynare Working Papers 52, CEPREMAP.
    17. Agénor, Pierre-Richard & Jia, Pengfei, 2020. "Capital controls and welfare with cross-border bank capital flows," Journal of Macroeconomics, Elsevier, vol. 65(C).
    18. Carvalho, Carlos & Pasca, Nilda & Souza, Laura & Zilberman, Eduardo, 2019. "Macroeconomic Macroeconomic Effects of Credit Deepening in Latin America," Working Papers 2019-013, Banco Central de Reserva del Perú.
    19. Chawwa, Tevy, 2021. "Impact of reserve requirement and Liquidity Coverage Ratio: A DSGE model for Indonesia," Economic Analysis and Policy, Elsevier, vol. 71(C), pages 321-341.
    20. Angelo Marsiglia Fasolo & Eurilton Araújo & Marcos Valli Jorge & Alexandre Kornelius & Leonardo Sousa Gomes Marinho, 2023. "Brazilian Macroeconomic Dynamics Redux: Shocks, Frictions, and Unemployment in SAMBA Model," Working Papers Series 578, Central Bank of Brazil, Research Department.
    21. Glocker, C., 2021. "Reserve requirements and financial stability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 71(C).
    22. Fabia A. Carvalho & Marcos R. Castro, 2017. "Macroprudential policy transmission and interaction with fiscal and monetary policy in an emerging economy: a DSGE model for Brazil," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 10(3), pages 215-259, September.
    23. Glocker, Christian, 2019. "Do reserve requirements reduce the risk of bank failure?," MPRA Paper 95634, University Library of Munich, Germany.
    24. Valerio Nispi Landi, 2017. "Capital controls, macroprudential measures and monetary policy interactions in an emerging economy," Temi di discussione (Economic working papers) 1154, Bank of Italy, Economic Research and International Relations Area.
    25. Fernando da Silva Vinhado & José Angelo Divino, 2015. "Monetary and Macroprudential Policies: Empirical Evidences from Panel-VAR," Brazilian Review of Finance, Brazilian Society of Finance, vol. 13(4), pages 691-731.

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    Keywords

    Brazil; Monetary issues; Optimization models;
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