Countercyclical capital rules for small open economies
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Organización Internacional del Trabajo (OIT)
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| Format: | Artículo científico |
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International Labour Organization
2017
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| _version_ | 1874524919702749187 |
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| author | Daragh Clancy Rossana Merola |
| author_facet | Daragh Clancy Rossana Merola Daragh Clancy Rossana Merola |
| contents | Countercyclical capital rules for small open economies Daragh Clancy Rossana Merola The growing literature on macroprudential regulation focuses on how a combination of monetary and macroprudential policies can boost macroeconomic and financial stability. We contribute to this literature by developing a DSGE model that assesses the effectiveness of countercyclical capital regulation in small open economies, in monetary unions or with exchange rate pegs, where policymakers do not have full control over traditional stabilisation instruments such as nominal interest and exchange rates. In such economies, macroprudential policy could potentially play an even more relevant role in mitigating the adverse effects of macro-financial feedback loops. To validate the model’s ability to replicate the stylised facts of financial crises, we calibrate using data for the Irish economy, the scene of a recent housing crash. Our results demonstrate that the pro-active use of countercyclical capital regulation – in the form of Basel III-type rules – can help attenuate boom-bust cycles driven by over-optimistic expectations. We also find that more aggressive action by regulators during the release phase can bolster the economy’s ability to absorb a negative shock. Banking in Macroeconomic Theory and Policy 10.1016/j.jmacro.2017.04.009 DOI https://doi.org/10.1016/j.jmacro.2017.04.009 publication.journalArticle |
| format | Artículo científico |
| id | ilo_995673156302676 |
| institution | Organización Internacional del Trabajo (OIT) |
| publishDate | 2017 |
| publisher | International Labour Organization |
| spellingShingle | Countercyclical capital rules for small open economies Daragh Clancy Rossana Merola Countercyclical capital rules for small open economies Daragh Clancy Rossana Merola The growing literature on macroprudential regulation focuses on how a combination of monetary and macroprudential policies can boost macroeconomic and financial stability. We contribute to this literature by developing a DSGE model that assesses the effectiveness of countercyclical capital regulation in small open economies, in monetary unions or with exchange rate pegs, where policymakers do not have full control over traditional stabilisation instruments such as nominal interest and exchange rates. In such economies, macroprudential policy could potentially play an even more relevant role in mitigating the adverse effects of macro-financial feedback loops. To validate the model’s ability to replicate the stylised facts of financial crises, we calibrate using data for the Irish economy, the scene of a recent housing crash. Our results demonstrate that the pro-active use of countercyclical capital regulation – in the form of Basel III-type rules – can help attenuate boom-bust cycles driven by over-optimistic expectations. We also find that more aggressive action by regulators during the release phase can bolster the economy’s ability to absorb a negative shock. Banking in Macroeconomic Theory and Policy 10.1016/j.jmacro.2017.04.009 DOI https://doi.org/10.1016/j.jmacro.2017.04.009 publication.journalArticle |
| title | Countercyclical capital rules for small open economies |
| url | https://researchrepository.ilo.org/esploro/outputs/journalArticle/Countercyclical-capital-rules-for-small-open/995673156302676 |