Monetary policy, banking, and systemic risk in open economies (original) (raw)
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In the aftermath of the global financial crisis in 2008, central banks across the globe reduced their policy rates by unprecedented margins. At the same time, commercial banks were increasing their lending rates in order to protect their crisis-induced fragile balance sheets. To a large extent, these opposing reactions reduced the efficacy of monetary policy in accommodating the substantial decline in aggregate demand seen at the time. In this paper, a standard small open economy New Keynesian DSGE model of the South African economy is extended to incorporate lending rates of commercial banks which deviate from the policy rate, especially in times of financial stress. Within the context of this structural model, the optimal reaction of the SARB to these lending rate deviations-or credit spreads-is analysed.
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The interbank market helps regulate liquidity in the banking sector. Banks with outstanding resources usually lend to banks that are in needs of liquidity. Regulating the interbank market may actually benefit the policy stance of monetary policy. Introducing an interbank market in a general equilibrium model may allow better identification of the final effects of non-conventional policy tools such as reserve requirements. We introduce an interbank market in which there are two types of private banks and a central bank that has the ability to issue money into a DSGE model. Then, we use the model to analyse the effects of changes to reserve requirements (a macroprudential tool), while the central bank follows a Taylor rule to set the policy interest rate. We find that changes to reserve requirements have similar effects to interest rate hikes and that both monetary policy tools can be used jointly in order to avoid big swings in the policy rate (that could have an undesired effect on private expectations) or a zero bound (i.e. liquidity trap scenarios).
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We introduce banks, modeled as in Diamond and Rajan (2000; 2001), in a standard DSGE macromodel and study the transmission of monetary policy and its interplay with bank capital regulation when banks are exposed to runs. A monetary expansion and a positive productivity shock increase bank leverage and risk. Risk-based capital requirements (as in Basel II) amplify the cycle and are welfare detrimental. Within a broad class of simple policy rules, the best combination includes mildly anticyclical capital ratios (as in Basel III) and a response of monetary policy to asset prices or bank leverage.
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Latin American Journal of Central Banking, 2020
We quantify the effect of macroprudential policy in mitigating domestic and foreign shocks to a small open commodity based economy estimated on Chilean data. The model features a heterogeneous banking sector and includes financial frictions through collateralized borrowing and unsecured loans with the possibility of endogenous haircuts or default. The estimation shows that shocks affect large and small banks differently through the heterogeneous adjustment of both the composition of assets and the level of liabilities. This implies that countercyclical capital buffers as well as the countercyclical liquidity coverage ratios need to be introduced jointly to maintain financial stability. Countercyclical capital buffers alone cause large and small banks to adjust their balance sheet sizes in opposite directions. Only combined capital and liquidity policies raise both types of banks costs while growing their assets and thus attenuate aggregate credit fluctuations over the business cycle. ☆ We would like to thank Mikhail Dmitriev and Christoffer Koch for helpful comments and suggestions. We also like to thank the participants of
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SSRN Electronic Journal, 2000
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.
Macroprudential Policy in a DSGE Model: anchoring the countercyclical capital buffer
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The 2007-8 world financial crisis highlighted the deficiency of the regulatory framework in place at the time. Thenceforth many papers have been assessing the introduction of macroprudential policy in a DSGE model. However, they do not focus on the choice of the variable to which the macroprudential instrument must respond - the anchor variable. In order to fulfil this gap, we input different macroprudential rules into the DSGE with a banking sector proposed by Gerali et al. (2010), and estimate its key parameters using Bayesian techniques applied to Brazilian data. We then rank the results using the unconditional expectation of lifetime utility as of time zero as the measure of welfare: the larger the welfare, the better the anchor variable. We find that credit growth is the variable that performs best.
2011
The Research and Policy Notes of the Czech National Bank (CNB) are intended to disseminate the results of the CNB's research projects as well as the other research activities of both the staff of the CNB and collaborating outside contributors, including invited speakers. The Notes aim to present topics related to strategic issues or specific aspects of monetary policy and financial stability in a less technical manner than the CNB Working Paper Series. The Notes are refereed internationally. The referee process is managed by the CNB Research Department. The Notes are circulated to stimulate discussion. The views expressed are those of the authors and do not necessarily reflect the official views of the CNB.
A Tale of Two Policies: Prudential Regulation and Monetary Policy with Fragile Banks
2009
We introduce banks, modeled as in Diamond and Rajan (JoF 2000 or JPE 2001), into a standard DSGE model and use this framework to study the role of banks in the transmission of shocks, the effects of monetary policy when banks are exposed to runs, and the interplay between monetary policy and Basel-like capital ratios. In equilibrium, bank leverage depends
Countercyclical prudential tools in an estimated DSGE model
2017
We develop a DSGE model for a small, open economy with a banking sector and endogenous default in order to perform a realistic assessment of macroprudential tools: countercyclical capital buffer (CCB) and dynamic provisions (DP). The model is estimated with data for Uruguay, where dynamic provisioning is in place since early 2000s. We find that (i) the source of the shock affecting the financial system matters, to select the appropriate indicator variable under the CCB rule, and to calibrate the size of the DP. Given a positive external shock, CCB (ii) generates buffers without major real effects; (iii) GDP as an indicator variable has quicker and stronger effects over bank capital; and (iv) the ratio of credit to GDP decreases, which discourages its use as an indicator variable. DP (v) generates buffers with real effects, and (vi) seems to outperform the CCB in terms of smoothing the cycle.