Countercyclical prudential tools in an estimated DSGE model

Serafin Frache, Jorge Ponce and Javier Garcia Cicco

No 2017001, Documentos de trabajo from Banco Central del Uruguay

Abstract: We develop a DSGE model for a small, open economy with a banking sector and endogenous default in order to perform a realistic assessment of macroprudential tools: countercyclical capital buffer (CCB) and dynamic provisions (DP). The model is estimated with data for Uruguay, where dynamic provisioning is in place since early 2000s. We find that (i) the source of the shock affecting the financial system matters, to select the appropriate indicator variable under the CCB rule, and to calibrate the size of the DP. Given a positive external shock, CCB (ii) generates buffers without major real effects; (iii) GDP as an indicator variable has quicker and stronger effects over bank capital; and (iv) the ratio of credit to GDP decreases, which discourages its use as an indicator variable. DP (v) generates buffers with real effects, and (vi) seems to outperform the CCB in terms of smoothing the cycle.

Keywords: Banking regulation; minimum capital requirement; countercyclical capital buffer; reserve requirement; dynamic loan loss provision; endogenous default; Basel III; DSGE; Uruguay (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2017
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cmp and nep-dge
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Related works:
Journal Article: Countercyclical prudential tools in an estimated DSGE model (2023)
Working Paper: Countercyclical Prudential Tools in an Estimated DSGE Model (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bku:doctra:2017001

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