A Quantitative Analysis of Countercyclical Capital Buffers

Miguel Faria-e-Castro

No 2019-008, Working Papers from Federal Reserve Bank of St. Louis

Abstract: What are the quantitative macroeconomic effects of the countercyclical capital buffer (CCyB)? I study this question in a nonlinear DSGE model with occasional financial crises, which is calibrated and combined with US data to estimate sequences of structural shocks. Raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. A quantitative application to the 2007-08 financial crisis shows that the CCyB in the 2.5% range (as in the Federal Reserve's current framework) could have greatly mitigated the financial panic of 2008, for a cumulative gain of 29% in aggregate consumption. The threat of raising capital requirements is effective even if this tool is not used in equilibrium.

Keywords: countercyclical capital buffers; financial crises; macroprudential policy (search for similar items in EconPapers)
JEL-codes: E4 E6 G2 (search for similar items in EconPapers)
Pages: 50
Date: 2019-03-19, Revised 2020-01-01
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: A quantitative analysis of the countercyclical capital buffer (2021)
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DOI: 10.20955/wp.2019.008

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