Macroprudential policy analysis in an estimated DSGE model with a heterogeneous banking system: An application to Chile
M. Udara Peiris and
Latin American Journal of Central Banking (previously Monetaria), 2020, vol. 1, issue 1
We quantify the effect of macroprudential policy in mitigating domestic and foreign shocks to a small open commodity based economy estimated on Chilean data. The model features a heterogeneous banking sector and includes financial frictions through collateralized borrowing and unsecured loans with the possibility of endogenous haircuts or default. The estimation shows that shocks affect large and small banks differently through the heterogeneous adjustment of both the composition of assets and the level of liabilities. This implies that countercyclical capital buffers as well as the countercyclical liquidity coverage ratios need to be introduced jointly to maintain financial stability. Countercyclical capital buffers alone cause large and small banks to adjust their balance sheet sizes in opposite directions. Only combined capital and liquidity policies raise both types of banks costs while growing their assets and thus attenuate aggregate credit fluctuations over the business cycle.
Keywords: Financial stability; Bank heterogeneity; Corporate default; Chilean economy; Open economy (search for similar items in EconPapers)
JEL-codes: F34 G15 G18 (search for similar items in EconPapers)
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)
Gold Open Access
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:lajcba:v:1:y:2020:i:1:s2666143820300168
Access Statistics for this article
Latin American Journal of Central Banking (previously Monetaria) is currently edited by Manuel Ramos-Francia
More articles in Latin American Journal of Central Banking (previously Monetaria) from Elsevier
Bibliographic data for series maintained by Catherine Liu ().