The Role of Capital Requirements and Credit Composition in the Transmission of Macroeconomic and Financial Shocks

Oscar Valencia (), Daniel Osorio and Pablo Garay
Additional contact information
Daniel Osorio: Banco de la República de Colombia

Borradores de Economia from Banco de la Republica de Colombia

Abstract: This paper builds a general equilibrium model that incorporates banks, financial frictions, default and a capital requirements. Ex-ante heterogeneous households decide how much to save or borrow for the sake of consumption (consumer credit) or the provision of housing services(mortgages). These choices are subject to borrowing limits, which depend on the value of real estate assets (for mortgages) or labour income (for consumer loans). The model includes final goods producers who must borrow in order to finance working capital/labour requirements (business credit borrowing) and intermediate good producers subject to nominal rigidities. Saving and borrowing are intermediated by a bank facing different capital requirements for each credit category. Any shock that has an impact on bank capital (for instance, a default shock) directly affects the bank’s income, the cost of external finance and, eventually, interest rates on loans. Changes in interest rates have second-round effects on labour and consumption through the borrowing limits. Simulations of the model suggest that the business cycle properties of credit and credit quality for each credit category are consistent with what is observed in the data.

Keywords: DSGE Models; Financial Frictions; Macroprudential Policy (search for similar items in EconPapers)
JEL-codes: E5 G21 G28 (search for similar items in EconPapers)
Pages: 29
Date: 2016-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.32468/be.954 (application/pdf)

Related works:
Journal Article: The role of capital requirements and credit composition in the transmission of macroeconomic and financial shocks (2017)
Journal Article: The role of capital requirements and credit composition in the transmission of macroeconomic and financial shocks (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:954

Access Statistics for this paper

More papers in Borradores de Economia from Banco de la Republica de Colombia Cra 7 # 14-78. Contact information at EDIRC.
Bibliographic data for series maintained by Clorith Angélica Bahos Olivera ().