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Countercyclical capital regulation in a small open economy DSGE model

Matija Lozej, Luca Onorante and Ansgar Rannenberg

Macroeconomic Dynamics, 2023, vol. 27, issue 5, 1230-1267

Abstract: We examine, conditional on structural shocks, the macroeconomic performance of different countercyclical capital buffer (CCyB) rules in small open economy estimated medium-scale Dynamic Stochastic General Equilibrium (DSGE) model. We find that rules based on the credit gap create a trade-off between the stabilization of fluctuations originating in the housing market and fluctuations caused by foreign demand shocks. The trade-off disappears if the regulator responds to house prices instead. It turns out that the welfare-maximising simple CCyB rule implies responding to house prices only and not to the credit gap. Such rule also leads to significant welfare gains compared to the no CCyB case.

Date: 2023
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Working Paper: Countercyclical capital regulation in a small open economy DSGE model (2018) Downloads
Chapter: Countercyclical capital regulation in a small open economy DSGE model (2017) Downloads
Working Paper: Countercyclical Capital Regulation in a Small Open Economy DSGE Model (2017) Downloads
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