Macroprudential Regulation and Macroeconomic Activity

Sudipto Karmakar

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: This paper develops a dynamic stochastic general equilibrium model to examine the impact of macroprudential regulation on bank’s financial decisions and the implications for the real sector. I explicitly incorporate costs and benefits of capital requirements. I model an occasionally binding capital constraint and approximate it using an asymmetric non linear penalty function. This friction means that the banks refrain from valuable lending. At the same time, countercyclical buffers provide structural stability to the financial system. I show that higher capital requirements can dampen the business cycle fluctuations. I also show that stronger regulation can induce banks to hold buffers and hence mitigate an economic downturn as well. Increasing the capital requirements do not seem to have an adverse effect on the welfare. Lastly, I also show that switching to a countercyclical capital requirement regime can help reduce fluctuations and raise welfare.

JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-reg
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https://www.bportugal.pt/sites/default/files/anexos/papers/wp201317.pdf

Related works:
Journal Article: Macroprudential regulation and macroeconomic activity (2016)
Working Paper: Macroprudential Regulation and Macroeconomic Activity (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w201317

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