A Quantitative Analysis of Countercyclical Capital Buffers

51 Pages Posted: 21 Mar 2019 Last revised: 28 Jan 2020

Date Written: 2019-03-19

Abstract

What are the quantitative effects of countercyclical capital buffers (CCyB)? I study this question in the context of a nonlinear DSGE model with a financial sector that is subject to occasional panics. A calibrated version of the model is combined with US data to estimate sequences of structural shocks, allowing me to study policy counterfactuals. First, I show that raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. Second, I show that lowering capital buffers during a panic can moderate the intensity of the resulting crisis. A quantitative application to the 2007-08 financial crisis shows that CCyB in the 2.5% range (as in the Federal Reserve's current framework) could have greatly mitigated the financial panic in 2007Q4-2008Q4, for a cumulative gain of 23% in aggregate consumption. These findings suggest that CCyB are a useful policy tool both ex-ante and ex-post.

Keywords: countercyclical capital buffers, financial crises, macroprudential policy

JEL Classification: E4, E6, G2

Suggested Citation

Faria-e-Castro, Miguel, A Quantitative Analysis of Countercyclical Capital Buffers (2019-03-19). FRB St. Louis Working Paper No. 2019-8, Available at SSRN: https://ssrn.com/abstract=3356016 or http://dx.doi.org/10.20955/wp.2019.008

Miguel Faria-e-Castro (Contact Author)

Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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