Macroeconomic Propagation Under Different Regulatory Regimes: Evidence From an Estimated DSGE Model For the Euro Area

96 Pages Posted: 4 Oct 2010

See all articles by Matthieu Darracq Paries

Matthieu Darracq Paries

European Central Bank (ECB)

Christoffer Kok

European Central Bank (ECB)

Diego Rodriguez-Palenzuela

European Central Bank (ECB)

Date Written: September 24, 2010

Abstract

The financial crisis clearly illuminated the potential amplifying role of financial factors on macroeconomic developments. Indeed, the heavy impairments of banks’ balance sheets brought to the fore the banking sector’s ability to provide a smooth flow of credit to the real economy. However, most existing structural macroeconomic models fail to take into account the crucial role of banks’ balance sheet adjustment in the propagation of shocks to the economy. This paper contributes to fill this gap, analyzing the role of credit market frictions in business cycle fluctuations and in the transmission of monetary policy. We estimate a closed-economy dynamic stochastic general equilibrium (DSGE) model for the euro area with financially-constrained households and firms and embedding an oligopolistic banking sector facing capital constraints. Using this setup we examine the macroeconomic implications of various financial frictions on the supply and demand of credit, and in particular we assess the effects of introducing risk-sensitive and more stringent capital requirements. Finally, we explore the scope for counter-cyclical bank capital rules and the strategic complementarities between macro-prudential tools and monetary policy.

Keywords: DSGE models, Bayesian estimation, Banking, Financial regulation

JEL Classification: E4, E5, F4

Suggested Citation

Darracq Paries, Matthieu and Kok, Christoffer and Rodriguez-Palenzuela, Diego, Macroeconomic Propagation Under Different Regulatory Regimes: Evidence From an Estimated DSGE Model For the Euro Area (September 24, 2010). ECB Working Paper No. 1251. Available at SSRN: https://ssrn.com/abstract=1682085

Matthieu Darracq Paries (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+496913446631 (Phone)
+496913447604 (Fax)

Christoffer Kok

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Diego Rodriguez-Palenzuela

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
(49) 69-1344-6480 (Phone)
(49) 69-1344-6575 (Fax) (Fax)

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