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Cyclically Adjusted Provisions and Financial Stability

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  • Pierre-Richard Agénor
  • Luiz A. Pereira da Silva

Abstract

This paper studies the extent to which alternative loan loss provisioning regimes affect the procyclicality of the financial system and financial stability. It uses a DSGE model with financial frictions (namely, balance sheet and collateral effects, as well as economies of scope in banking) and a generic formulation of provisioning regimes. Numerical experiments with a parameterized version of the model show that cyclically adjusted (or, more commonly called, dynamic) provisioning can be highly effective in terms of mitigating procyclicality and financial instability, measured in terms of the volatility of the credit-output ratio and real house prices, in response to financial shocks. The optimal combination of simple cyclically adjusted provisioning and countercyclical reserve requirements rules is also studied. The simultaneous use of these instruments does not improve the ability of either one of them to mitigate financial instability, making them partial substitutes rather than complements.

Suggested Citation

  • Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2016. "Cyclically Adjusted Provisions and Financial Stability," IDB Publications (Working Papers) 7619, Inter-American Development Bank.
  • Handle: RePEc:idb:brikps:7619
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    Cited by:

    1. Ag�nor, Pierre-Richard & Gambacorta, Leonardo & Kharroubi, Enisse & Lombardo, Giovanni & Pereira da Silva, Luiz A., 2017. "The International Dimensions of Macroprudential Policies," CEPR Discussion Papers 12108, C.E.P.R. Discussion Papers.
    2. repec:eee:finsta:v:31:y:2017:i:c:p:136-153 is not listed on IDEAS
    3. Serafín Frache & Javier García-Cicco & Jorge Ponce, 2017. "Countercyclical Prudential Tools in an Estimated DSGE Model," Documentos de Trabajo (working papers) 0917, Department of Economics - dECON.

    More about this item

    Keywords

    Financial Systems; Financial Frictions; Capital Goods; Housing Demand Shock; credit market; Investment Loan; Financial Stability; Loan Loss Reserves; Interest rates; Housing Price; Commercial Banks; Financial Frictions; Loan Loss Reserves; Financial Systems; Loan loss provisions; Financial Stability;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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