Macroprudential regulation and macroeconomic activity

Sudipto Karmakar

Journal of Financial Stability, 2016, vol. 25, issue C, 166-178

Abstract: I develop a dynamic stochastic general equilibrium model to examine the impact of macroprudential regulation on banks’ financial decisions and the implications for the real sector. I model an occasionally binding capital requirement constraint and analyze its costs and benefits. This friction means that the banks refrain from valuable lending. At the same time, capital requirements provide structural stability to the financial system. I show that higher capital requirements can dampen the business cycle fluctuations and raise welfare. I also show that switching to a countercyclical capital requirement regime can help reduce volatility and raise welfare. Finally, by means of the welfare analysis, I also obtain the optimal level of capital requirement.

Keywords: Capital requirement; Prudential regulation; Financial accelerator; Procyclicality (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (26)

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Related works:
Working Paper: Macroprudential Regulation and Macroeconomic Activity (2013)
Working Paper: Macroprudential Regulation and Macroeconomic Activity (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:25:y:2016:i:c:p:166-178

DOI: 10.1016/j.jfs.2016.06.006

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