Abstract:

Macroprudential policy has become increasingly relevant following the Great Financial Crisis. One of the main additions to the policy toolkit of authorities was the introduction of capital surcharges for the banking sector. This paper studies the effects of introducing capital based instruments using a DSGE model of an economy with a monopolistic banking sector in which banks have to maintain a certain capital requirement. The capital target is adjusted and shocked in order to simulate an unanticipated change following a macroprudential policy decision. The model is calibrated and estimated for Romania, a small non-euro area economy. The main results show that macroprudential policy is effective in adjusting an overheating economy and bursting a house price bubble. Compared to a calibration of the same model to the euro area economy, the effect of various shocks is larger but has shorter duration.