Countercyclical prudential tools in an estimated DSGE model

Serafin Frache (), Javier García-Cicco and Jorge Ponce

No 2307, Documentos de Trabajo/Working Papers from Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo.

Abstract: We developed a dynamic stochastic general equilibrium (DSGE) model for a small, open economy with a banking sector and endogenous default to assess two macroprudential tools: countercyclical capital buffers (CCB) and dynamic provisions (DP). The model is estimated with data for Uruguay, where dynamic provisioning has existed since the early 2000s. Both tools force banks to build buffers, but DP seem to outperform the CCB in smoothing the cycle. We also find that the source of the shock affecting the financial system matters in assessing the relative performance of both tools. Given a positive external shock, the credit-to-GDP ratio decreases, which should discourage its use as an indicator variable to activate countercyclical regulation

Keywords: Banking regulation; Minimum capital requirement; Countercyclical capital buffer; Reserve requirement; (Countercyclical or dynamic) loan loss provision; Endogenous default; Basel III; DSGE; Uruguay (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:mnt:wpaper:2307

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