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A quantitative analysis of the countercyclical capital buffer

Miguel Faria-e-Castro

No 120, ESRB Working Paper Series from European Systemic Risk Board

Abstract: What are the quantitative macroeconomic effects of the countercyclical capital buffer (CCyB)? I study this question in a nonlinear DSGE model with occasional financial crises, which is calibrated and combined with US data to estimate sequences of structural shocks. Raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. A quantitative application to the 2007-08 financial crisis shows that the CCyB in the 2:5% range (as in the Federal Reserve's current framework) could have greatly mitigated the financial panic of 2008, for a cumulative gain of 29% in aggregate consumption. The threat of raising capital requirements is effective even if this tool is not used in equilibrium. JEL Classification: E4, E6, G2

Keywords: countercyclical capital buffer; financial crises; macroprudential policy (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac and nep-rmg
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Working Paper: A Quantitative Analysis of Countercyclical Capital Buffers (2020) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:2021120

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