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The effects of countercyclical leverage buffers on macroeconomic and financial stability

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  • Pozo, Jorge

Abstract

We quantitatively study the effectiveness of several target variables for countercyclical leverage buffers in promoting macroeconomic and financial stability. To do this we introduce banks and a regulatory leverage requirement rule to a DSGE model. The capital requirement consists of a fixed part and a countercyclical part. We find that the tighter the fixed leverage requirement, the better able banks are to handle a financial crisis, but these also reduce long-term consumption and welfare. More importantly, countercyclical leverage buffers that respond to deviation of the observed credit to GDP ratio from its long-term value, or to percentage deviation of the observed credit (or GDP) from its long-term value improve macroeconomic and financial stability and increase welfare. Being forward-looking does not pay off. Interestingly, when buffers respond to the percentage deviation of asset prices from their long-term values or to credit (or GDP) growth, macroeconomic and financial stability is negatively affected.

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  • Pozo, Jorge, 2023. "The effects of countercyclical leverage buffers on macroeconomic and financial stability," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 194-217.
    • Handle: RePEc:eee:quaeco:v:89:y:2023:i:c:p:194-217
    DOI: 10.1016/j.qref.2023.03.010
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    Cited by:

    1. Krenz, Johanna & Živanović, Jelena, 2024. "Macroprudential capital requirements, monetary policy, and financial crises," Economic Modelling, Elsevier, vol. 139(C).

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    More about this item

    Keywords

    Countercyclical leverage ratio; Financial stability; Macroeconomic stability;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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