Effects of Releasing Capital Requirements: A DSGE Approach

Abstract

This paper simulates a macroprudential policy of reduction in capital requirements, in line with the measures promoted by macroprudential authorities to face the effects of the recent pandemic crisis on real economy. We do that in an otherwise standard DSGE model augmented with a housing sector and a macroprudential regulator. Results show that a regulatory intervention aiming at reducing capital requirements entails a deep and prolonged recession, worsening financial and macroeconomic stability. Overall, it follows that the effects could be opposite to those desired. Two channels lead to this outcome: the financial channel of interest rates on deposits and loans, and the real estate channel of housing prices.