Macroprudential Policy Interactions in a Sectoral DSGE Model with Staggered Interest Rates

64 Pages Posted: 3 Feb 2021

See all articles by Marc Hinterschweiger

Marc Hinterschweiger

Bank of England

Kunal Khairnar

University of Toulouse 1 - Toulouse School of Economics (TSE)

Tolga Ozden

University of Amsterdam, Faculty of Economics and Business (FEB), Students

Thomas Stratton

Bank of England

Date Written: January 22, 2021

Abstract

We develop a two-sector DSGE model with a detailed banking sector along the lines of Clerc et al (2015) to assess the impact of macroprudential tools (minimum, countercyclical and sectoral capital requirements, as well as a loan-to-value limit) on key macroeconomic and financial variables. The banking sector features residential mortgages and corporate lending subject to staggered interest rates à la Calvo (1983), which is motivated by the sluggish movement of lending rates due to fixed interest rate loan contracts. Other distortions in the model include limited liability, bankruptcy costs and penalty costs for deviations from regulatory capital. We estimate the model using Bayesian methods based on quarterly UK data over 1998 Q1–2016 Q2. Our contributions are threefold. We show that: (i) co-ordination of macroprudential tools may have a welfare-improving effect, (ii) macroprudential tools would have improved some macroeconomic indicators but, within our model, not have prevented the Global Financial Crisis, (iii) staggered interest rates may alter the transmission of macroprudential tools that work through interest rates.

Keywords: Sectoral DSGE model, macroprudential policy, interest rate stickiness

JEL Classification: E32, E58, G18, G21

Suggested Citation

Hinterschweiger, Marc and Khairnar, Kunal and Ozden, Tolga and Stratton, Thomas, Macroprudential Policy Interactions in a Sectoral DSGE Model with Staggered Interest Rates (January 22, 2021). Bank of England Working Paper No. 904, Available at SSRN: https://ssrn.com/abstract=3778185 or http://dx.doi.org/10.2139/ssrn.3778185

Marc Hinterschweiger (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Kunal Khairnar

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Tolga Ozden

University of Amsterdam, Faculty of Economics and Business (FEB), Students ( email )

Amsterdam
Netherlands

Thomas Stratton

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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