A penalty function approach to occasionally binding credit constraints

Michal Brzoza-Brzezina, Marcin Kolasa and Krzysztof Makarski

Economic Modelling, 2015, vol. 51, issue C, 315-327

Abstract: Empirical evidence suggests that contractionary monetary and macroprudential policies have stronger effects than expansionary ones. We introduce this feature into a structural DSGE model with financial frictions. The asymmetry results from the assumption of occasionally binding credit constraints which we introduce via a penalty function. Our simulations show that a large loan-to-value ratio (our macroprudential tool) tightening can have a much stronger impact on the economy than a loosening of the same size. In contrast, small policy innovations, whether expansionary or contractionary, have effects of almost equal magnitude. Our approach provides an interesting way of modeling asymmetric effects of financial frictions for policy purposes.

Keywords: Financial frictions; DSGE models; Occasionally binding constraints penalty function (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Working Paper: A penalty function approach to occasionally binding credit constraints (2015)
Working Paper: A penalty function approach to occasionally binding credit constraints (2013)
Working Paper: A penalty function approach to occasionally binding credit constraints (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:51:y:2015:i:c:p:315-327

DOI: 10.1016/j.econmod.2015.07.021

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