A General Equilibrium Appraisal of Capital Shortfall

Eric Jondeau and Jean-Guillaume Sahuc

No 18-12, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We quantify the capital shortfall that results from a global financial crisis by using a macro-finance dynamic stochastic general equilibrium model that captures the interactions between the financial and real sectors of the economy. We show that a crisis similar to that observed in 2008 generates a capital shortfall (or stressed expected loss, SEL) equal to 2.8% of euro-area GDP, which corresponds to approximately 250 billion euros. We also find that using a cycle-dependent capital ratio that combines concern for both credit growth and SEL has a positive effect on output growth while mitigating the excessive risk taking of the banking system. Finally, our estimates confirm that most of the variability of the macroeconomic and financial variables at business cycle frequencies is due to investment and risk shocks.

Keywords: Capital Shortfall; Systemic Risk; Leverage; Financial system; Euro Area; DSGE Model (search for similar items in EconPapers)
JEL-codes: E32 E44 G01 G21 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2018-02, Revised 2018-02
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-rmg
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: A General Equilibrium Appraisal of Capital Shortfall (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1812

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