EconPapers    
Economics at your fingertips  
 

Housing and credit market shocks: Exploring the role of rule-based Basel III counter-cyclical capital requirements

Guangling Liu and Thabang Molise

Economic Modelling, 2019, vol. 82, issue C, 264-279

Abstract: This paper examines the extent to which the Basel III bank capital regulation attenuates fluctuations in housing and credit markets and fosters financial and macroeconomic stability. We use a positive housing demand shock to mimic a housing market boom and a negative financial shock for credit squeeze and economic meltdown. The results show that the rule-based Basel III counter-cyclical capital requirement effectively attenuates fluctuations in housing and credit markets and prevents bubbles. In the case of a negative financial shock, it significantly reduces the magnitude of economic meltdown. Our analysis of the transition from Basel II to Basel III suggests that it is the counter-cyclical capital buffer that effectively mitigates the pro-cyclicality of its predecessor, while the impact of the conservative buffer is marginal. In contrast to the credit-to-GDP ratio, the optimal policy analysis suggests that the regulatory authority should adjust the capital requirement to changes in credit and output when implementing the counter-cyclical buffer. Future research could extend the study by comparing the effectiveness of the rule-based Basel III with other macroprudential tools in achieving financial and macroeconomic stability.

Keywords: Basel III; Counter-cyclical capital requirements; DSGE; Financial stability; Macroprudential policy (search for similar items in EconPapers)
JEL-codes: E44 E47 E58 G28 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999318306060
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:82:y:2019:i:c:p:264-279

DOI: 10.1016/j.econmod.2019.01.013

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Nithya Sathishkumar ().

 
Page updated 2021-03-09
Handle: RePEc:eee:ecmode:v:82:y:2019:i:c:p:264-279