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A Quantitative Analysis of Countercyclical Capital Buffers

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  • Miguel Faria-e-Castro

Abstract

What are the quantitative macroeconomic effects of the countercyclical capital buffer (CCyB)? I study this question in a nonlinear DSGE model with occasional financial crises, which is calibrated and combined with US data to estimate sequences of structural shocks. Raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. A quantitative application to the 2007-08 financial crisis shows that the CCyB in the 2.5% range (as in the Federal Reserve's current framework) could have greatly mitigated the financial panic of 2008, for a cumulative gain of 29% in aggregate consumption. The threat of raising capital requirements is effective even if this tool is not used in equilibrium.

Suggested Citation

  • Miguel Faria-e-Castro, 2019. "A Quantitative Analysis of Countercyclical Capital Buffers," Working Papers 2019-008, Federal Reserve Bank of St. Louis, revised 01 Jan 2020.
  • Handle: RePEc:fip:fedlwp:2019-008
    DOI: 10.20955/wp.2019.008
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    References listed on IDEAS

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    Cited by:

    1. Mikkelsen, Jakob & Poeschl, Johannes, 2019. "Banking Panic Risk and Macroeconomic Uncertainty," MPRA Paper 94729, University Library of Munich, Germany.

    More about this item

    Keywords

    financial crises; countercyclical capital buffers; macroprudential policy;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G2 - Financial Economics - - Financial Institutions and Services
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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