On December 12, 2019, Fed in Print will introduce its new platform for discovering content. Please direct your questions to Anna Oates
Federal Reserve Bank of St. Louis
A Quantitative Analysis of Countercyclical Capital Buffers
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.
Cite this item
Miguel Faria-e-Castro, A Quantitative Analysis of Countercyclical Capital Buffers, Federal Reserve Bank of St. Louis, Working Papers 2019-8, 19 Mar 2019, revised 01 Jun 2019.
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- G2 - Financial Economics - - Financial Institutions and Services
Keywords: countercyclical capital buffers; financial crises; macroprudential policy
This item with handle RePEc:fip:fedlwp:2019-008
is also listed on EconPapers
For corrections, contact Anna Oates ()