Macroprudential policy interactions in a sectoral DSGE model with staggered interest rates

Marc Hinterschweiger, Kunal Khairnar (), Tolga Ozden () and Tom Stratton ()
Additional contact information
Kunal Khairnar: Toulouse School of Economics
Tolga Ozden: University of Amsterdam
Tom Stratton: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 904, Bank of England working papers from Bank of England

Abstract: We develop a two-sector DSGE model with a detailed banking sector along the lines of Clerc et al (2015) to assess the impact of macroprudential tools (minimum, countercyclical and sectoral capital requirements, as well as a loan-to-value limit) on key macroeconomic and financial variables. The banking sector features residential mortgages and corporate lending subject to staggered interest rates à la Calvo (1983), which is motivated by the sluggish movement of lending rates due to fixed interest rate loan contracts. Other distortions in the model include limited liability, bankruptcy costs and penalty costs for deviations from regulatory capital. We estimate the model using Bayesian methods based on quarterly UK data over 1998 Q1–2016 Q2. Our contributions are threefold. We show that: (i) co-ordination of macroprudential tools may have a welfare-improving effect, (ii) macroprudential tools would have improved some macroeconomic indicators but, within our model, not have prevented the Global Financial Crisis, (iii) staggered interest rates may alter the transmission of macroprudential tools that work through interest rates.

Keywords: Sectoral DSGE model; macroprudential policy; interest rate stickiness (search for similar items in EconPapers)
JEL-codes: E32 E58 G18 G21 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2021-01-22
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0904

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