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Countercyclical Prudential Tools in an Estimated DSGE Model

Serafín Frache, Javier García-Cicco and Jorge Ponce ()
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Serafín Frache: Banco Central del Uruguay y Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República
Javier García-Cicco: Banco Central de Chile y Universidad Católica Argentina

Authors registered in the RePEc Author Service: Javier Garcia Cicco

No 917, Documentos de Trabajo (working papers) from Department of Economics - dECON

Abstract: We develop a DSGE model for a small, open economy with a banking sector and endogenous default. The model is used to perform a realistic assessment of two macroprudential tools: countercyclical capital buffers (CCB) and dynamic provisions (DP). The model is estimated with data for Uruguay, where dynamic provisioning is in place since early 2000s. In general, while both tools force banks to build buffers, we find that DP seems to outperform the CCB in terms of smoothing the cycle. We also find that the source of the shock affecting the financial system matters to discuss the relative performance of both tools. In particular, given a positive external shock the ratio of credit to GDP decreases, which discourages its use as an indicator variable to activate countercyclical regulation.

Keywords: banking regulation; minimum capital requirement; countercyclical capital buffer; reserve requirement; (countercyclical or 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)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cmp, nep-dge and nep-rmg
Date: 2017-08
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