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A Quantitative Analysis of Countercyclical Capital Buffers

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Abstract

What are the quantitative effects of countercyclical capital buffers (CCyB)? I study this question in the context of a nonlinear DSGE model with a financial sector that is subject to occasional panics. A calibrated version of the model is combined with US data to estimate sequences of structural shocks, allowing me to study policy counterfactuals. First, I show that raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. Second, I show that lowering capital buffers during a panic can moderate the intensity of the resulting crisis. A quantitative application to the 2007-08 financial crisis shows that CCyB in the 2.5% range (as in the Federal Reserve's current framework) could have greatly mitigated the financial panic in 2007Q4-2008Q4, for a cumulative gain of 23% in aggregate consumption. These findings suggest that CCyB are a useful policy tool both ex-ante and ex-post.

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  • Faria-e-Castro, Miguel, 2019. "A Quantitative Analysis of Countercyclical Capital Buffers," Working Papers 2019-8, Federal Reserve Bank of St. Louis, revised 01 Jun 2019.
  • Handle: RePEc:fip:fedlwp:2019-008
    DOI: 10.20955/wp.2019.008
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    References listed on IDEAS

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    1. Elenev, Vadim & Landvoigt, Tim & Van Nieuwerburgh, Stijn, 2016. "Phasing out the GSEs," Journal of Monetary Economics, Elsevier, vol. 81(C), pages 111-132.
    2. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711.
    3. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
    4. Gertler, Mark & Kiyotaki, Nobuhiro & Prestipino, Andrea, 2017. "A Macroeconomic Model with Financial Panics," International Finance Discussion Papers 1219, Board of Governors of the Federal Reserve System (U.S.).
    5. Tim Landvoigt & Stijn Van Nieuwerburgh & Vadim Elenev, 2016. "A Macroeconomic Model with Financially Constrained Producers and Intermediaries," 2016 Meeting Papers 1224, Society for Economic Dynamics.
    6. Poeschl, Johannes & Zhang, Xue, 2018. "Bank Capital Regulation and Endogenous Shadow Banking Crises," MPRA Paper 92529, University Library of Munich, Germany.
    7. Paul, Pascal, 2017. "A Macroeconomic Model with Occasional Financial Crises," Working Paper Series 2017-22, Federal Reserve Bank of San Francisco.
    8. Caterina Mendicino & Kalin Nikolov & Javier Suarez & Dominik Supera, 2018. "Optimal Dynamic Capital Requirements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(6), pages 1271-1297, September.
    9. Greg Kaplan & Giovanni L. Violante, 2014. "A Model of the Consumption Response to Fiscal Stimulus Payments," Econometrica, Econometric Society, vol. 82(4), pages 1199-1239, July.
    10. Karmakar, Sudipto, 2016. "Macroprudential regulation and macroeconomic activity," Journal of Financial Stability, Elsevier, vol. 25(C), pages 166-178.
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    12. Anat Admati & Martin Hellwig, 2013. "The Bankers' New Clothes: What's Wrong with Banking and What to Do about It," Economics Books, Princeton University Press, edition 1, number 9929, September.
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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

    countercyclical capital buffers; financial crises; macroprudential policy;

    JEL classification:

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

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