A General Equilibrium Appraisal of Capital Shortfall

65 Pages Posted: 20 Feb 2018 Last revised: 27 Feb 2018

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute

Jean-Guillaume Sahuc

Banque de France; Université Paris Ouest - Nanterre, La Défense - EconomiX

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Date Written: February 20, 2018

Abstract

We quantify the capital shortfall that results from a global financial crisis by using a macro-finance dynamic stochastic general equilibrium model that captures the interactions between the financial and real sectors of the economy. We show that a crisis similar to that observed in 2008 generates a capital shortfall (or stressed expected loss, SEL) equal to 2.8% of euro-area GDP, which corresponds to approximately 250 billion euros. We also find that using a cycle-dependent capital ratio that combines concern for both credit growth and SEL has a positive effect on output growth while mitigating the excessive risk taking of the banking system. Finally, our estimates confirm that most of the variability of the macroeconomic and financial variables at business cycle frequencies is due to investment and risk shocks.

Keywords: Capital Shortfall, Systemic Risk, Leverage, Financial system, Euro Area, DSGE Model

JEL Classification: E32, E44, G01, G21

Suggested Citation

Jondeau, Eric and Sahuc, Jean-Guillaume, A General Equilibrium Appraisal of Capital Shortfall (February 20, 2018). Swiss Finance Institute Research Paper No. 18-12. Available at SSRN: https://ssrn.com/abstract=3126905 or http://dx.doi.org/10.2139/ssrn.3126905

Eric Jondeau (Contact Author)

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

Extranef 232
Lausanne, 1012
Switzerland
+41 21 692 33 49 (Phone)

HOME PAGE: http://www.hec.unil.ch/ejondeau/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Jean-Guillaume Sahuc

Banque de France ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01
France
+33 1 42 92-49-52 (Phone)
+33 1 42-92-62-92 (Fax)

HOME PAGE: http:// https://sites.google.com/site/sahuceconomics/

Université Paris Ouest - Nanterre, La Défense - EconomiX ( email )

200 Avenue de la République
Nanterre cedex, Nanterre Cedex 92000
France

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