The effects of countercyclical leverage buffers on macroeconomic and financial stability

Pozo J. · Quarterly Review of Economics and Finance (2023) · DOI: 10.1016/j.qref.2023.03.010

Resumen

We quantitatively study the effectiveness of several target variables for countercyclical leverage buffers in promoting macroeconomic and financial stability. To do this we introduce banks and a regulatory leverage requirement rule to a DSGE model. The capital requirement consists of a fixed part and a countercyclical part. We find that the tighter the fixed leverage requirement, the better able banks are to handle a financial crisis, but these also reduce long-term consumption and welfare. More importantly, countercyclical leverage buffers that respond to deviation of the observed credit to GDP ratio from its long-term value, or to percentage deviation of the observed credit (or GDP) from its long-term value improve macroeconomic and financial stability and increase welfare. Being forward-looking does not pay off. Interestingly, when buffers respond to the percentage deviation of asset prices from their long-term values or to credit (or GDP) growth, macroeconomic and financial stability is negatively affected.