IDEAS home Printed from https://ideas.repec.org/p/bcb/wpaper/387.html
   My bibliography  Save this paper

Foreign Capital Flows, Credit Growth and Macroprudential Policy in a DSGE Model with Traditional and Matter-of-Fact Financial Frictions

Author

Listed:
  • Fabia A. de Carvalho
  • Marcos R. Castro

Abstract

We investigate the transmission channel of reserve requirements, capital requirements, and risk weights of different types of credit in the computation of capital adequacy ratios and compare the power of each macroprudential instrument to counteract the impact of domestic and international shocks that potentially challenge financial stability. To this end, we model a small open economy that receives inflows of foreign direct investment, foreign portfolio investment, and issues foreign debt. The central bank manages international reserves, with an impact on the foreign exchange market and on the country risk premium. Shocks in international markets affect domestic credit even though foreign capital flows are directly destined to non-financial institutions. Banks operate in four distinct credit markets: consumer, housing and commercial– each of them facing default risk and having specific borrowing constraints– and safe export-related credit lines in the form of working capital loans to exporters. Consumer loans are granted based on banks’ expectations with respect to borrowers’ future labor income net of senior debt services. Banks optimize their balance sheet allocation facing frictions intended to reproduce banks’ incentives given regulatory constraints. The model is estimated with Bayesian techniques using data from Brazil.

Suggested Citation

  • Fabia A. de Carvalho & Marcos R. Castro, 2015. "Foreign Capital Flows, Credit Growth and Macroprudential Policy in a DSGE Model with Traditional and Matter-of-Fact Financial Frictions," Working Papers Series 387, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:387
    as

    Download full text from publisher

    File URL: https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/wps387.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Carlos Montoro & Ramon Moreno, 2011. "The use of reserve requirements as a policy instrument in Latin America," BIS Quarterly Review, Bank for International Settlements, March.
    2. Fabia Carvalho & Fabia A. de Carvalho & Silvio Michael de Azevedo Costa & Marcos Ribeiro de Castro, 2013. "Traditional and matter-of-fact financial frictions in a DSGE model for Brazil: the role of macroprudential instruments and monetary policy," EcoMod2013 5145, EcoMod.
    3. Roberto Motto & Massimo Rostagno & Lawrence J. Christiano, 2010. "Financial Factors in Economic Fluctuations," 2010 Meeting Papers 141, Society for Economic Dynamics.
    4. Fabia Aparecida de Carvalho & Cyntia F. Azevedo, 2008. "The incidence of reserve requirements in Brazil: Do bank stockholders share the burden?," Journal of Applied Economics, Universidad del CEMA, vol. 11, pages 61-90, May.
    5. Fabia A. de Carvalho & Cyntia F. Azevedo, 2008. "The Incidence of Reserve Requirements in Brazil: Do Bank Stockholders Share the Burden?," Journal of Applied Economics, Taylor & Francis Journals, vol. 11(1), pages 61-90, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mădălin Viziniuc, 2017. "Potential Gains from Cooperation Between Monetary and Macroprudential Policies: The Case of an Emerging Economy," Eastern European Economics, Taylor & Francis Journals, vol. 55(5), pages 420-452, September.
    2. Bank for International Settlements, 2016. "Experiences with the ex ante appraisal of macroprudential instruments," CGFS Papers, Bank for International Settlements, number 56.
    3. Divino, Jose Angelo & Haraguchi, Carlos, 2022. "Monetary Policy And Reserve Requirements In A Small Open Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 26(4), pages 1073-1106, June.
    4. Marcos R. Castro, 2019. "Sectoral Countercyclical Buffers in a DSGE Model with a Banking Sector," Working Papers Series 503, Central Bank of Brazil, Research Department.
    5. Leonardo Nogueira Ferreira & Márcio Issao Nakane, 2018. "Macroprudential policy in a DSGE model: anchoring the countercyclical capital buffer," Economics Bulletin, AccessEcon, vol. 38(4), pages 2345-2352.
    6. Fabia A. Carvalho & Marcos R. Castro, 2017. "Macroprudential policy transmission and interaction with fiscal and monetary policy in an emerging economy: a DSGE model for Brazil," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 10(3), pages 215-259, September.
    7. Georgiadis, Georgios & Jančoková, Martina, 2020. "Financial globalisation, monetary policy spillovers and macro-modelling: Tales from 1001 shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 121(C).
    8. Zeeshan Nezami Ansari & Muzffar Hussain Dar & Shadman Zafar, 2023. "Do capital inflows affect domestic bank credit? Empirical evidence from India," Future Business Journal, Springer, vol. 9(1), pages 1-10, December.
    9. Gulan, Adam & Jokivuolle, Esa & Verona, Fabio, 2022. "Optimal bank capital requirements: What do the macroeconomic models say?," BoF Economics Review 2/2022, Bank of Finland.
    10. Rodríguez, Aldo, 2020. "Estimación Bayesiana de un Modelo de Economía Abierta con Sector Bancario," Dynare Working Papers 52, CEPREMAP.
    11. Fabia A. de Carvalho & Marcos R. de Castro, 2015. "Macroprudential and Monetary Policy Interaction: a Brazilian perspective," Working Papers Series 405, Central Bank of Brazil, Research Department.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fabia Carvalho & Fabia A. de Carvalho & Silvio Michael de Azevedo Costa & Marcos Ribeiro de Castro, 2013. "Traditional and matter-of-fact financial frictions in a DSGE model for Brazil: the role of macroprudential instruments and monetary policy," EcoMod2013 5145, EcoMod.
    2. Joseph Bitar, 2022. "A note on reserve requirements and banks' liquidity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 4837-4852, October.
    3. Agénor, Pierre-Richard & Jia, Pengfei, 2020. "Capital controls and welfare with cross-border bank capital flows," Journal of Macroeconomics, Elsevier, vol. 65(C).
    4. Christian Glocker & Pascal Towbin, 2012. "Reserve Requirements for Price and Financial Stability: When Are They Effective?," International Journal of Central Banking, International Journal of Central Banking, vol. 8(1), pages 65-114, March.
    5. Glocker, Christian & Towbin, Pascal, 2015. "Reserve requirements as a macroprudential instrument – Empirical evidence from Brazil," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 158-176.
    6. Cañón, Carlos & Margaretic, Paula, 2014. "Correlated bank runs, interbank markets and reserve requirements," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 515-533.
    7. Patrice T. Robitaille, 2011. "Liquidity and reserve requirements in Brazil," International Finance Discussion Papers 1021, Board of Governors of the Federal Reserve System (U.S.).
    8. International Monetary Fund, 2012. "Credit Growth and the Effectiveness of Reserve Requirements and Other Macroprudential Instruments in Latin America," IMF Working Papers 2012/142, International Monetary Fund.
    9. Glocker, Christian, 2019. "Do reserve requirements reduce the risk of bank failure?," MPRA Paper 95634, University Library of Munich, Germany.
    10. Juan Pablo Medina & Jorge Roldós, 2018. "Monetary and Macroprudential Policies to Manage Capital Flows," International Journal of Central Banking, International Journal of Central Banking, vol. 14(1), pages 201-257, January.
    11. Christian Glocker & Pascal Towbin, 2012. "The Macroeconomic Effects of Reserve Requirements," WIFO Working Papers 420, WIFO.
    12. Glocker, C., 2021. "Reserve requirements and financial stability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 71(C).
    13. Agénor, Pierre-Richard & Alper, Koray & Pereira da Silva, Luiz, 2018. "External shocks, financial volatility and reserve requirements in an open economy," Journal of International Money and Finance, Elsevier, vol. 83(C), pages 23-43.
    14. Mr. G. Terrier & Mr. Rodrigo O. Valdes & Mr. Camilo E Tovar Mora & Mr. Jorge A Chan-Lau & Carlos Fernandez Valdovinos & Ms. Mercedes Garcia-Escribano & Mr. Carlos I. Medeiros & Man-Keung Tang & Miss M, 2011. "Policy Instruments to Lean Against the Wind in Latin America," IMF Working Papers 2011/159, International Monetary Fund.
    15. Ricardo Hausmann, 2008. "In Search of the Chains that Hold Brazil Back," Growth Lab Working Papers 20, Harvard's Growth Lab.
    16. Fabia A. de Carvalho & Marcos R. de Castro, 2015. "Macroprudential and Monetary Policy Interaction: a Brazilian perspective," Working Papers Series 405, Central Bank of Brazil, Research Department.
    17. Ramos-Tallada, Julio, 2015. "Bank risks, monetary shocks and the credit channel in Brazil: Identification and evidence from panel data," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 135-161.
    18. Primus, Keyra, 2017. "Excess reserves, monetary policy and financial volatility," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 153-168.
    19. Valerio Nispi Landi, 2017. "Capital controls, macroprudential measures and monetary policy interactions in an emerging economy," Temi di discussione (Economic working papers) 1154, Bank of Italy, Economic Research and International Relations Area.
    20. Rodríguez, Aldo, 2020. "Estimación Bayesiana de un Modelo de Economía Abierta con Sector Bancario," Dynare Working Papers 52, CEPREMAP.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bcb:wpaper:387. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Rodrigo Barbone Gonzalez (email available below). General contact details of provider: https://www.bcb.gov.br/en .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.