Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/336305 
Year of Publication: 
2020
Citation: 
[Journal:] Latin American Journal of Central Banking (LAJCB) [ISSN:] 2666-1438 [Volume:] 1 [Issue:] 1/4 [Article No.:] 100016 [Year:] 2020 [Pages:] 1-36
Publisher: 
Elsevier, Amsterdam
Abstract: 
We quantify the effect of macroprudential policy in mitigating domestic and foreign shocks to a small open commodity based economy estimated on Chilean data. The model features a heterogeneous banking sector and includes financial frictions through collateralized borrowing and unsecured loans with the possibility of endogenous haircuts or default. The estimation shows that shocks affect large and small banks differently through the heterogeneous adjustment of both the composition of assets and the level of liabilities. This implies that countercyclical capital buffers as well as the countercyclical liquidity coverage ratios need to be introduced jointly to maintain financial stability. Countercyclical capital buffers alone cause large and small banks to adjust their balance sheet sizes in opposite directions. Only combined capital and liquidity policies raise both types of banks costs while growing their assets and thus attenuate aggregate credit fluctuations over the business cycle.
Subjects: 
Bank heterogeneity
Chilean economy
Corporate default
Financial stability
Open economy
JEL: 
F34
G15
G18
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Article

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