A Semi-Structural Model for Credit Cycle and Policy Analysis – An Application for Luxembourg

Carlos de Resende, Alexandra Solovyeva and Moez Souissi

No 2024/140, IMF Working Papers from International Monetary Fund

Abstract: The paper explores the nexus between the financial and business cycles in a semi-structural New Keynesian model with a financial accelerator, an active banking sector, and an endogenous macroprudential policy reaction function. We parametrize the model for Luxembourg through a mix of calibration and Bayesian estimation techniques. The model features dynamic properties that align with theoretical priors and empirical evidence and displays sensible data-matching and forecasting capabilities, especially for credit indicators. We find that the credit gap, which remained positive during COVID-19 amid continued favorable financial conditions and policy support, had been closing by mid-2022. Model-based forecasts using data up to 2022Q2 and conditional on the October 2022 WEO projections for the Euro area suggest that Luxembourg's business and credit cycles would deteriorate until late 2024. Based on these insights about the current and projected positions in the credit cycle, the model can guide policymakers on how to adjust the macroprudential policy stance. Policy simulations suggest that the weights given to measures of credit-to-GDP and asset price gaps in the macroprudential policy rule should be well-calibrated to avoid unwarranted volatility in the policy response.

Keywords: Macroprudential policy; credit cycle; banks; forecasting and simulation; Luxembourg; impulse response; credit demand and supply shock; credit demand shock; Policy simulation; IMF working paper 24/140; credit supply shock; forecasting capability; Credit; Credit cycles; Capital adequacy requirements; Countercyclical capital buffers; Global (search for similar items in EconPapers)
Pages: 47
Date: 2024-07-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec and nep-fdg
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=551447 (application/pdf)

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:imf:imfwpa:2024/140

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().