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Macroprudential policy with convertible debt

Hylton Hollander ()

Journal of Macroeconomics, 2017, vol. 54, issue PB, 285-305

Abstract: This paper studies the effectiveness of countercyclical capital requirements and contingent convertible capital (CoCos) in limiting financial instability, and its associated influence on the real economy. To do this, I augment both features into a standard business cycle framework with an equity market and a banking sector. The model is calibrated to real U.S. data and used for simulations. The findings suggest that a countercyclical capital adequacy rule and CoCos provide an effective dual approach to macroprudential policy. On the one hand, a capital adequacy rule mitigates the build-up of systemic risk through a capital buffer. On the other hand, CoCos are able to reduce the impact of a sudden decline in bank capital.

Keywords: Contingent convertible debt; Bank capital; Bank regulation; Basel; DSGE (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 G38 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:54:y:2017:i:pb:p:285-305

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