GDP at Risk in a DSGE Model: An Application to Banking Sector Stress Testing

30 Pages Posted: 19 Dec 2007 Last revised: 1 Feb 2008

See all articles by Esa Jokivuolle

Esa Jokivuolle

Bank of Finland, Research Unit

Juha Kilponen

Bank of Finland - Research

Tero Kuusi

Bank of Finland - Research

Date Written: 2007

Abstract

We suggest a complementary tool for financial stability analysis based on stochastic simulation of a dynamic stochastic general equilibrium model (DSGE) of the macro economy. The paper relates to financial stability research in which financial aggregates crucial to financial stability are modelled as functions of macroeconomic variables. In these models, stress tests for eg banking sector loan losses can be generated by considering adverse scenarios of macro variables. A DSGE model provides a systematic way of generating coherent macro scenarios which can be given a rigorous economic interpretation. The approach is illustrated using a DSGE model of the Finnish economy and a simple model of Finnish banking sector loan losses.

Keywords: DSGE models, financial stability, loan losses, stress testing

JEL Classification: E13, E37, G21, G28

Suggested Citation

Jokivuolle, Esa and Kilponen, Juha and Kuusi, Tero, GDP at Risk in a DSGE Model: An Application to Banking Sector Stress Testing (2007). Bank of Finland Research Discussion Paper No. 26/2007, Available at SSRN: https://ssrn.com/abstract=1077051 or http://dx.doi.org/10.2139/ssrn.1077051

Esa Jokivuolle (Contact Author)

Bank of Finland, Research Unit ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2309 (Phone)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/jokivuolle_esa/

Juha Kilponen

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/kilponen_juha/

Tero Kuusi

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

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