Robust Design of Countercyclical Capital Buffer Rules
60 Pages Posted: 31 Oct 2024
Date Written: October 25, 2024
Abstract
In this paper, we design countercyclical capital buffer rules that perform robustly across a wide range of Dynamic Stochastic General Equilibrium (DSGE) models. These rules offer valuable guidance for policymakers uncertain about the most appropriate model(s) for decision-making. Our results show that robust rules call for a relatively restrained response from macroprudential authorities. The cost of insuring against model uncertainty is moderate, emphasizing the practicality of following these robust countercyclical capital buffer rules in uncertain economic environments.
Keywords: countercyclical capital buffers, macroprudential policy, model comparison, structural models, model uncertainty, robust rule
JEL Classification: E44, E32, E47, E60, G20, G28
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