Macroprudential Regulation and Macroeconomic Activity

Karmakar, Sudipto

doi:10.2139/ssrn.2238813

Cited by 8 publications

(10 citation statements)

References 29 publications

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“…Currently, there is an ongoing international policy debate vis-à-vis how capital affects bank risks. The proponents of this view, such as the Basel Committee, argue that capital-based measures are crucial for bank risk mitigation (International Monetary Fund, 2010) from both macro-prudential (de Souza, 2016; Karmakar, 2016; Meeks, 2017) and micro-prudential point of views (Blahova, 2015; Vollmer and Wiese, 2013). Nevertheless, some studies find only limited evidence regarding the role of bank capital as an indicator for bank failure (e.g.…”

Section: Introductionmentioning

confidence: 99%

Risk and capital in Indonesian large banks

Raz

2018

JFEP

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Purpose The purpose of this paper is to examine the behavior of banking risk in the emerging economies, particularly Indonesia and contribute to the discussion on the existing policy debate regarding the impact of capital on bank risk. Design/methodology/approach This study investigates the relationship between bank risk and capital using data on 15 Indonesian large banks between 2008 and 2015, using z-score and Delta-CoVaR to measure both idiosyncratic and systemic risks. Findings The empirical investigation suggests that capital has a negative and significant relationship with these risk measures. The authors also find that higher systemic risk encourages banks to increase their capital. However, similar evidence is not found in the idiosyncratic risk models. Finally, the role of capital in reducing risk is considered robust only during the normal periods, as banks may increase their assets risk during times of financial distress. Originality/value Systemic risk (CoVaR) is used to represent bank risk. This study focuses on the Indonesian banking sector (capture institutional arrangements and regulatory environment). It covers the period of 2008 GFC and post-crisis period.

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Section: Introductionmentioning

confidence: 99%

Risk and capital in Indonesian large banks

Raz

2018

JFEP

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“…7 A second generation of models studies how capital requirements should optimally change depending on current economic and financial conditions. Karmakar (2016) studies the effects of countercyclical capital requirements in the context of a real DSGE model and finds that raising capital requirements reduces volatility and raises welfare. Davydiuk (2017) shows that countercyclical capital requirements arise as the optimal Ramsey policy in a setting where the social planner tries to curb excessive lending while ensuring liquidity provision by banks.…”

Section: Boardmentioning

confidence: 99%

A Quantitative Analysis of the Countercyclical Capital Buffer

Faria-e-Castro

2021

SSRN Journal

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What are the quantitative macroeconomic effects of the countercyclical capital buffer (CCyB)? I study this question in a nonlinear DSGE model with occasional financial crises, which is calibrated and combined with US data to estimate sequences of structural shocks. Raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. A quantitative application to the 2007-08 financial crisis shows that the CCyB in the 2.5% range (as in the Federal Reserve's current framework) could have greatly mitigated the financial panic of 2008, for a cumulative gain of 29% in aggregate consumption. The threat of raising capital requirements is effective even if this tool is not used in equilibrium.

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“…There are two common approaches to this method: first, to add the penalty function to the policy-maker's welfare criterion (see Woodford (2003), Levine et al (2008), Levine et al (2012)); second, to adding the penalty function to the agents' welfare criteria in the model (see Den Haan and Wind (2012), Abo-Zaid (2015), Karmakar (2016). The general idea is that we allow anything to be feasible but let the objective function have some welfare penalty if the constraint is violated.…”

Section: The Zlb Constraint Through a Penalty Functionmentioning

confidence: 99%

Mandates and Monetary Rules in a New Keynesian Framework

2020

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We develop a general mandate framework for delegating monetary policy to an instrument-independent, but goal-dependent central bank. The goal of the mandate consists of: (i) a simple quadratic loss function that penalizes deviations from target macroeconomic variables; (ii) a form of a Taylor-type nominal interest-rate rule that responds to the same target variables; (iii) a zero-lower-bound (ZLB) constraint on the the nominal interest rate in the form of an unconditional probability of ZLB episodes and (iv) a long-run (steady-state) inflation target. The central bank remains free to choose the strength of its response to the targets specified by the mandate. An estimated standard New Keynesian model is used to compute household-welfareoptimal mandates with these features. We find two main results that are robust across a number of different mandates: first, the optimized rule takes the form of a Taylor simple rule close to a price-level rule. Second, the optimal level of inflation target, conditional on a quarterly frequency of the nominal interest hitting the ZLB of 0.025, is close to the typical target annual inflation of 2% and to achieve a lower probability of 0.01 requires an inflation target of 3.5%.

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Macroprudential Regulation and Macroeconomic Activity

Cited by 8 publications

References 29 publications

Risk and capital in Indonesian large banks

Risk and capital in Indonesian large banks

A Quantitative Analysis of the Countercyclical Capital Buffer

Mandates and Monetary Rules in a New Keynesian Framework

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