Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/80774
Authors: 
De Resende, Carlos
Dib, Ali
Lalonde, René
Perevalov, Nikita
Year of Publication: 
2013
Series/Report no.: 
Bank of Canada Working Paper 2013-8
Abstract: 
Using BoC-GEM-Fin, a large-scale DSGE model with real, nominal and financial frictions featuring a banking sector, we explore the macroeconomic implications of various types of countercyclical bank capital regulations. Results suggest that countercyclical capital requirements have a significant stabilizing effect on key macroeconomic variables, but mostly after financial shocks. Moreover, the bank capital regulatory policy and monetary policy interact, and this interaction is contingent on the type of shocks that drive the economic cycle. Finally, we analyze loss functions based on macroeconomic and financial variables to arrive at an optimal countercyclical regulatory policy in a class of simple implementable Taylor-type rules. Compared to bank capital regulatory policy, monetary policy is able to stabilize the economy more efficiently after real shocks. On the other hand, financial shocks require the regulator to be more aggressive in loosening/tightening capital requirements for banks, even as monetary policy works to counter the deviations of inflation from the target.
Subjects: 
Economic models
Financial institutions
Financial stability
International topics
JEL: 
E32
E44
E5
G1
G2
Document Type: 
Working Paper

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