A Quantitative Analysis of the Countercyclical Capital Buffer

52 Pages Posted: 3 Jun 2021

Date Written: June, 2021

Abstract

What are the quantitative macroeconomic effects of the countercyclical capital buffer (CCyB)? I study this question in a nonlinear DSGE model with occasional financial crises, which is calibrated and combined with US data to estimate sequences of structural shocks. Raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. A quantitative application to the 2007-08 financial crisis shows that the CCyB in the 2:5% range (as in the Federal Reserve's current framework) could have greatly mitigated the financial panic of 2008, for a cumulative gain of 29% in aggregate consumption. The threat of raising capital requirements is effective even if this tool is not used in equilibrium.

JEL Classification: E4, E6, G2

Suggested Citation

Faria-e-Castro, Miguel, A Quantitative Analysis of the Countercyclical Capital Buffer (June, 2021). ESRB: Working Paper Series 2021/120, Available at SSRN: https://ssrn.com/abstract=3858301

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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