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Assessing the costs and benefits of capital-based macroprudential policy

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  • Behn, Markus
  • Gross, Marco
  • Peltonen, Tuomas A.

Abstract

We develop an integrated Early Warning Global Vector Autoregressive (EW-GVAR) model to quantify the costs and benefits of capital-based macroprudential policy measures. Our findings illustrate that capital-based measures are transmitted both via their impact on the banking system’s resilience and via indirect macro-financial feedback effects. The feedback effects relate to dampened credit and asset price growth and, depending on how banks move to higher capital ratios, can account for up to a half of the overall effectiveness of capitalbased measures. Moreover, we document significant cross-country spillover effects, especially for measures implemented in larger countries. Overall, our model helps to understand how and through which channels changes in capitalization affect bank lending and the wider economy and can inform policy makers on the optimal calibration and timing of capital-based macroprudential instruments. JEL Classification: G01, G21, G28

Suggested Citation

  • Behn, Markus & Gross, Marco & Peltonen, Tuomas A., 2016. "Assessing the costs and benefits of capital-based macroprudential policy," ESRB Working Paper Series 17, European Systemic Risk Board.
  • Handle: RePEc:srk:srkwps:201617
    Note: 2203070
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    3. Kelly, Jane & Le Blanc, Julia & Lydon, Reamonn, 2018. "Pockets of risk in European Housing Markets: then and now," Research Technical Papers 12/RT/18, Central Bank of Ireland.
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    5. Alin Marius Andries & Florentina Melnic, 2019. "Macroprudential Policies And Economic Growth," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 23, pages 95-112, June.
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    More about this item

    Keywords

    cost-benefit analysis; early-warning system; GVAR; macroprudential policy;
    All these keywords.

    JEL classification:

    • 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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