Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/149247 
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper No. 6160
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We develop a stylized DSGE model in which banks face capital regulation and their loan portfolios are subject to non-diversifiable losses due to aggregate shocks. The framework is used to explore the importance of the interaction between macroeconomic conditions, credit default and bank capitalization for the transmission of macroeconomic shocks. We fit the model to euro area data. Impulse response analysis shows that the aforementioned interaction substantially magnifies the responsiveness of the economy to real and nominal demand side disturbances. The amplification is especially strong with respect to government spending shocks. The model is further capable of replicating two financial market characteristics that are documented in the empirical literature, i.e. the pro-cyclicality of bank profitability and the counter-cyclical response of firm default rates and credit spreads to monetary policy shocks.
Subjects: 
DSGE model
bank capital
aggregate loan losses
business cycle fluctuations
JEL: 
E44
E51
G21
G33
Document Type: 
Working Paper
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