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GDP at risk in a DSGE model: an application to banking sector stress testing

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  • Jokivuolle, Esa
  • Kilponen, Juha
  • Kuusi, Tero

Abstract

We suggest a complementary tool for financial stability analysis based on stochastic simulation of a dynamic stochastic general equilibrium model (DSGE) of the macro economy. The paper relates to financial stability research in which financial aggregates crucial to financial stability are modelled as functions of macroeconomic variables. In these models, stress tests for eg banking sector loan losses can be generated by considering adverse scenarios of macro variables. A DSGE model provides a systematic way of generating coherent macro scenarios which can be given a rigorous economic interpretation. The approach is illustrated using a DSGE model of the Finnish economy and a simple model of Finnish banking sector loan losses.

Suggested Citation

  • Jokivuolle, Esa & Kilponen, Juha & Kuusi, Tero, 2007. "GDP at risk in a DSGE model: an application to banking sector stress testing," Bank of Finland Research Discussion Papers 26/2007, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2007_026
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    References listed on IDEAS

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    1. Chirinko, Robert S. & Guill, Gene D., 1991. "A framework for assessing credit risk in depository institutions: Toward regulatory reform," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 785-804, September.
    2. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    3. repec:zbw:bofrdp:2006_028 is not listed on IDEAS
    4. Pesola, Jarmo, 2001. "The role of macroeconomic shocks in banking crises," Bank of Finland Research Discussion Papers 6/2001, Bank of Finland.
    5. repec:zbw:bofrdp:2001_006 is not listed on IDEAS
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    More about this item

    Keywords

    DSGE models; financial stability; loan losses; stress testing;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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