Countercyclical Capital Regulation in a Small Open Economy DSGE Model

Transcription

1 Countercyclical Capital Regulation in a Small Open Economy DSGE Model Matija Lozej Luca Onorante Ansgar Rannenberg Central Bank of Ireland European Central Bank May 7 Lozej & Onorante & Rannenberg (CBIE/ECB) May 7 /

2 Disclaimer THE VIEWS EXPRESSED HERE ARE THE VIEWS OF THE AUTHORS AND DO NOT NECESSARILY REFLECT THE VIEWS OF THE CENTRAL BANK OF IRELAND OR OF THE EUROSYSTEM. Lozej & Onorante & Rannenberg (CBIE/ECB) May 7 /

3 Motivation Motivation ESRB has recommended national regulators to vary CCyB depending on the credit-to-gdp ratio, and possibly other variables The analysis of this rule has unconditional (based on cycles obtained from filtered data), but not conditional on shocks We look at the performance of the ESRB rule and other such rules for typical shocks affecting a small open economy using an extension of the model of Clancy and Merola () Rules based on the credit-to-gdp ratio perform well in response to housing demand shocks, but worsen the response of the economy to export demand shocks Rules based on house prices appear to perform better since house prices tend to be procyclical after typical shocks affecting a small open economy Lozej & Onorante & Rannenberg (CBIE/ECB) May 7 3 /

4 Overview of the model Graphical representation of the model Lozej & Onorante & Rannenberg (CBIE/ECB) May 7 /

5 Countercyclical capital rules Capital rules The credit gap and the house price gap are defined as: ( L t gap t = L ) Y t + Y t + Y t + Y t 3 Y ESRB rule: Linear rule: price gap t = P H,t P H P H if gap t % g t = 8% +.3 gap t if % < gap t 8%.% if gap t > 8% g t = 8% + α gap t Constant capital: α = ; credit gap: α =.3; house price gap α =.8 Lozej & Onorante & Rannenberg (CBIE/ECB) May 7 /

6 Calibration Bringing the model to the data To bring the model to the data, we use the following approach: Parameters that affect the steady state are set to match the Great Ratios (e.g., shares of imports, exports,...) Parameters that have clear counterparts in the literature are set to standard values (labour supply elasticity, markups,...) Parameters affecting model dynamics, and especially those without a clear counterpart in the literature, were calibrated by matching the model responses to the responses from a structural VAR Lozej & Onorante & Rannenberg (CBIE/ECB) May 7 6 /

7 Calibration Impulse-response matching Supply->GDP Supply->GDP deflator Supply->Rel. P H Supply->Exports - House P.->GDP - House P.->GDP deflator - House P.->Rel. P H - House P.->Exports Ex->GDP Ex->GDP deflator Ex->Rel. P H Ex->Exports Int. rate->gdp - Int. rate->gdp deflator - Int. rate->rel. P H - Int. rate->exports VAR Model - Lozej & Onorante & Rannenberg (CBIE/ECB) May 7 7 /

8 Overview of simulations Results We perform the following simulations A positive housing demand shock A one-time (but persistent) increase in households preference for housing A bubble on the housing market An expected increase in households preference for housing in the future (news shock), expected in the beginning of year 3 When the increase in housing demand is supposed to materialise, it does not Households find themselves with too much housing, loans, foreign debt, and wish to deleverage immediately A negative foreign demand shock A one-time (but persistent) decrease in foreigners demand for imported goods Lozej & Onorante & Rannenberg (CBIE/ECB) May 7 8 /

9 Results A positive housing demand shock GDP Consumption Investment - Exports - Imports 3 House prices Loan interest rate - Required return on assets Loan default rate (ann.) Real loans Real domestic deposits Real foreign deposits - - Real Equity Bank capital ratio Credit gap Capital requirement Fixed High fixed ESRB Linear, credit gap Linear, house price gap Lozej & Onorante & Rannenberg (CBIE/ECB) May 7 9 /

10 Results Boom and bust on the housing market GDP - Imports Consumption - House prices - Investment - Loan interest rate - Exports - Required return on assets - Loan default rate (ann.) - Real Equity - Real loans - Bank capital ratio Real domestic deposits - Credit gap Real foreign deposits 6 Capital requirement - Fixed High fixed ESRB Linear, credit gap Linear, house price gap Lozej & Onorante & Rannenberg (CBIE/ECB) May 7 /

11 Results Negative foreign demand shock GDP Consumption Investment Exports - Imports - Loan default rate (ann.) House prices - Real loans Loan interest rate 3 - Real domestic deposits - - Required return on assets 3 - Real foreign deposits Real Equity Bank capital ratio - Credit gap -3 - Fixed High fixed ESRB Linear, credit gap Linear, house price gap Capital requirement Lozej & Onorante & Rannenberg (CBIE/ECB) May 7 /

12 Conclusions Main messages CCyB rules based on the credit gap work well for some shocks Rules without floors or caps perform better The key mechanism for dampening boom-bust cycles is the build-up and subsequent release of the capital buffer For shocks to foreign demand (a highly relevant shock for small open economies), the rules based on the credit gap do not perform well because the credit gap is not procyclical after such shocks Because house prices react procyclically even after foreign demand shocks, more attention should be paid to them when setting CCyB in small open economies Lozej & Onorante & Rannenberg (CBIE/ECB) May 7 /