scholarly journals Informality, Frictions, and Macroprudential Policy

2019 ◽  
Vol 2019 (255) ◽  
Author(s):  
Moez Ben Hassine ◽  
Nooman Rebei
Keyword(s):  
Open Economy ◽  
Inflation Targeting ◽  
Banking Sector ◽  
Financial Frictions ◽  
Small Open Economy ◽  
Dynamic Stochastic General Equilibrium ◽  
Macroprudential Policy ◽  
Macroprudential Policies ◽  
Labor Search ◽  
Dynamic Stochastic

We analyze the effects of macroprudential policies through the lens of an estimated dynamic stochastic general equilibrium (DSGE) model tailored to developing markets. In particular, we explicitly introduce informality in the labor and goods markets within a small open economy embedding financial frictions, nominal and real rigidities, labor search and matching, and an explicit banking sector. We use the estimated version of the model to run welfare analysis under optimized monetary and macroprudential rules. Results show that although informality reduces the efficiency of macroprudential policies following a convex fashion, combining the latter with an inflation targeting objective could be beneficial.

Financial openness, bank capital flows, and the effectiveness of macroprudential policies

2021 ◽  
pp. 1-32
Author(s):  
Hao Jin ◽  
Chen Xiong
Keyword(s):  
Open Economy ◽  
Capital Flows ◽  
Open Economies ◽  
Small Open Economy ◽  
Empirical Support ◽  
Bank Capital ◽  
Macroprudential Policy ◽  
Funding Sources ◽  
Macroprudential Policies ◽  
Dynamic Stochastic

Abstract This paper quantitatively examines the macroeconomic and welfare effects of macroprudential policies in open economies. We develop a small open economy dynamic stochastic general equilibrium (DSGE) model, where banks choose their funding sources (domestic vs. foreign deposits) and are subject to financial constraints. Our model predicts that banks reduce leverage in response to a macroprudential policy tightening, but increasingly rely on foreign funding. This endogenous shifts of funding composition significantly undermine the stabilizing effect and welfare gains of macroprudential policies. Our results also suggest macroprudential policies are less effective in financially more open economies, and optimal policy should take capital flows into consideration. Finally, we find empirical support for the model predictions in a group of developing and emerging economies.

scholarly journals Macroprudential Policy in a Heterogeneous Environment—An Application of Agent-Based Approach in Systemic Risk Modelling

Entropy ◽  
2020 ◽  
Vol 22 (2) ◽  
pp. 129
Author(s):  
Jagoda Kaszowska-Mojsa ◽  
Mateusz Pipień
Keyword(s):  
Systemic Risk ◽  
Financial Distress ◽  
Dynamic Stochastic General Equilibrium ◽  
Macroprudential Policy ◽  
Risk Modelling ◽  
Agent Based ◽  
Macroprudential Policies ◽  
Dynamic Stochastic ◽  
Rbc Models ◽  
The Impact

Assessment of welfare effects of macroprudential policy seems the most important application of the Dynamic Stochastic General Equilibrium (DSGE) framework of macro-modelling. In particular, the DSGE-3D model, with three layers of default (3D), was developed and used by the European Systemic Risk Board and European Central Bank as a reference tool to formally model the financial cycle as well as to analyze effects of macroprudential policies. Despite the extreme importance of incorporating financial constraints in Real Business Cycle (RBC) models, the resulting DSGE-3D construct still embraces the representative agent idea, making serious analyses of diversity of economic entities impossible. In this paper, we present an alternative to DSGE modelling that seriously departs from the assumption of the representativeness of agents. Within an Agent Based Modelling (ABM) framework, we build an environment suitable for performing counterfactual simulations of the impact of macroprudential policy on the economy, financial system and society. We contribute to the existing literature by presenting an ABM model with broad insight into heterogeneity of agents. We show the stabilizing effects of macroprudential policies in the case of economic or financial distress.

China’s Monetary and Macroprudential Policies: Are They Complementary or Substitutive?

2020 ◽  
Author(s):  
Peter Sinclair ◽  
Lixin Sun
Keyword(s):  
Financial Stability ◽  
Banking Sector ◽  
Dynamic Stochastic General Equilibrium ◽  
Macroeconomic Policies ◽  
Macroprudential Policies ◽  
Policy Experiments ◽  
Quantitative Results ◽  
Dynamic Stochastic ◽  
The Interest Rate ◽  
Reserve Ratio

Abstract This paper develops a calibrated dynamic stochastic general equilibrium model incorporating a banking sector and some unique features of China’s macroeconomic policies to simulate China’s monetary and macroprudential policies. The quantitative results show, first, that the interest rate is a better instrument for China’s monetary policy than the required reserve ratio (RRR) when the central bank is solely concerned about price stability; second, that the loan-to-value ratio is a very useful macroprudential tool for China’s financial stability, and the RRR could be used as an instrument for both objectives; third, monetary and macroprudential policies could be either complements or substitutes in China, depending on the choices of instruments for the two policies. Our policy experiments recommend three combination choices of instruments for China’s monetary and macroprudential policies. (JEL codes: E52, E61and G18)

scholarly journals Synergies Between Monetary and Macroprudential Policies in Thailand

2020 ◽  
Vol 20 (83) ◽  
Author(s):  
Ichiro Fukunaga ◽  
Manrique Saenz
Keyword(s):  
Monetary Policy ◽  
General Equilibrium ◽  
Dynamic Stochastic General Equilibrium ◽  
Policy Rule ◽  
Macroprudential Policy ◽  
Policy Rules ◽  
Macroprudential Policies ◽  
Wide Range ◽  
Monetary Policy Rule ◽  
Dynamic Stochastic

A dynamic stochastic general equilibrium (DSGE) model tailored to the Thai economy is used to explore the performance of alternative monetary and macroprudential policy rules when faced with shocks that directly impact the financial cycle. In this context, the model shows that a monetary policy focused on its traditional inflation and output objectives accompanied by a well targeted counter-cyclical macroprudential policy yields better macroeconomic outcomes than a lean-against-the-wind monetary policy rule under a wide range of assumptions.

THE ROLE OF FOREIGN DEBT AND FINANCIAL FRICTIONS IN A SMALL OPEN ECONOMY DSGE MODEL

2016 ◽  
Vol 61 (05) ◽  
pp. 1550077
Author(s):  
MYUNG-SOO YIE ◽  
BYOUNG HARK YOO
Keyword(s):  
Business Cycle ◽  
Open Economy ◽  
Risk Premium ◽  
Financial Frictions ◽  
Foreign Debt ◽  
Small Open Economy ◽  
State Level ◽  
Korean Economy ◽  
Dynamic Stochastic

We examine the role of foreign debt and financial frictions in the Korean business cycle using a small open economy DSGE (dynamic stochastic general equilibrium) model where domestic banks borrow external funds, denominated in foreign currencies, for a risk premium and make loans to domestic producers. We find that the Korean economy is ‘financially vulnerable’, which means that the risk premium increases when the domestic currency depreciates. As a result, depreciation could cause recession, rather than expansion, when there exist substantial amount of foreign debt or financial frictions. A simulation shows that the Korean business cycle would suffer less volatility with a lower steady-state level of foreign debt or no financial frictions.

LABOR MARKET VOLATILITY, SKILLS, AND FINANCIAL GLOBALIZATION

2013 ◽  
Vol 18 (5) ◽  
pp. 1018-1047 ◽  
Author(s):  
Claudia M. Buch ◽  
Christian Pierdzioch
Keyword(s):  
Open Economy ◽  
Small Open Economy ◽  
Dynamic Stochastic General Equilibrium ◽  
Financial Globalization ◽  
Skilled Workers ◽  
Hours Worked ◽  
Skill Levels ◽  
Level Data ◽  
Dynamic Stochastic ◽  
The Impact

We analyze the impact of financial globalization on volatilities of hours worked and wages of high-skilled and low-skilled workers. Using cross-country, industry-level data for the years 1970–2004, we establish stylized facts that document how volatilities of hours worked and wages of workers with different skill levels have changed over time. We then document that the volatility of hours worked by low-skilled workers has increased the most in response to the increase in financial globalization. We develop a dynamic stochastic general equilibrium model of a small open economy that is consistent with the empirical results. The model predicts that greater financial globalization increases the volatility of hours worked, and this effect is strongest for low-skilled workers.

scholarly journals Overborrowing and Systemic Externalities in the Business Cycle

2011 ◽  
Vol 101 (7) ◽  
pp. 3400-3426 ◽  
Author(s):  
Javier Bianchi
Keyword(s):  
Quantitative Analysis ◽  
Open Economy ◽  
Financial Crises ◽  
Credit Constraints ◽  
Small Open Economy ◽  
Dynamic Stochastic General Equilibrium ◽  
Constrained Efficiency ◽  
Dynamic Stochastic ◽  
The Business Cycle ◽  
The Cost

Credit constraints linking debt to market-determined prices embody a systemic credit externality that drives a wedge between competitive and constrained socially optimal equilibria, inducing private agents to overborrow. This externality arises because private agents fail to internalize the financial amplification effects of carrying a large amount of debt when credit constraints bind. We conduct a quantitative analysis of this externality in a two-sector dynamic stochastic general equilibrium (DSGE) model of a small open economy calibrated to emerging markets. Raising the cost of borrowing during tranquil times restores constrained efficiency and significantly reduces the incidence and severity of financial crises. JEL: E13, E32, E44, F41, G01

scholarly journals INTERNALISASI SEKTOR PERBANKAN DALAM MODEL DSGE

2014 ◽  
Vol 17 (1) ◽  
pp. 23-60
Author(s):  
Harmanta Harmanta ◽  
Nur M. Adhi Purwanto ◽  
Fajar Oktiyanto Oktiyanto
Keyword(s):  
Monetary Policy ◽  
Open Economy ◽  
Banking Sector ◽  
Small Open Economy ◽  
Jel Classification ◽  
Capital Adequacy ◽  
Macroprudential Policy ◽  
Financial Friction ◽  
Policy Bank ◽  
The Impact

We build DSGE model for small open economy with financial friction in the form of collateral constrain on banking sector, designed for Indonesian economy. The constructed model is capable to simulate the monetary policy (Bank Indonesia rate) and macroprudential policy (reserve requirement, capital adequacy ratio – CAR, and loan to value – LTV). By internalizing banking sector into the model, this model also enable us to simulate the impact of any shock originated from banking sector.  Keywords: monetary policy, DSGE with banking sector, macroprudential policy JEL Classification: E32, E44, E52, E58 

scholarly journals Monetary and Macroprudential Policies in an Intangible Economy

2020 ◽  
Vol 53 (3) ◽  
pp. 325-353
Author(s):  
Guido Baldi ◽  
André Bodmer
Keyword(s):  
Banking Sector ◽  
Dynamic Stochastic General Equilibrium ◽  
Intangible Capital ◽  
Specific Productivity ◽  
Productivity Shocks ◽  
Policy Rules ◽  
Taylor Rules ◽  
Macroprudential Policies ◽  
Advanced Economies ◽  
Dynamic Stochastic

Advanced economies are increasingly based on intangible capital. Intangible capital has at least two special characteristics compared to tangible capital. First, it can be simultaneously used to produce different goods. Second, it is less suitable as collateral for obtaining external funds than tangible capital. These features could influence monetary and macroprudential policies. Against this backdrop, we study the effects of monetary and macroprudential policies by using a dynamic stochastic general equilibrium model with intangible capital and a banking sector. In our model, sector-specific productivity shocks to tangible and intangible production have different effects on the economy, in particular on inflation and loans. In addition, the two shocks lead to different reactions of monetary and macroprudential policies. As a result, the volatility of macroeconomic variables differs across shocks and policy rules. In particular, augmented Taylor rules increase the volatility of loans after an intangible productivity shock and, from this perspective, appear to be less desirable than macroprudential rules after this type of shock. However, welfare effects of different policy rules are not qualitatively different across shocks because of similar impacts on the volatility of consumption.

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