Robust Design of Countercyclical Capital Buffer Rules

60 Pages Posted: 31 Oct 2024

See all articles by Dominik Hecker

Dominik Hecker

Deutsche Bundesbank

Hun Jang

Bank of Korea - Economic Research Institute

Margarita Rubio

University of Nottingham

Fabio Verona

Bank of Finland - Research

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

Suggested Citation

Hecker, Dominik and Jang, Hun and Rubio, Margarita and Verona, Fabio, Robust Design of Countercyclical Capital Buffer Rules (October 25, 2024). Bank of Finland Research Discussion Paper No. 9/2024, Available at SSRN: https://ssrn.com/abstract=5006256 or http://dx.doi.org/10.2139/ssrn.5006256

Dominik Hecker (Contact Author)

Deutsche Bundesbank ( email )

Hun Jang

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

Margarita Rubio

University of Nottingham ( email )

Fabio Verona

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

HOME PAGE: http://fabioverona.rvsteam.net/

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