Implementing Macroprudential Policy in NiGEM

| Publication date: 26 Mar 2018 | Theme: Macroeconomics | NIESR Author(s): Davis, P; Liadze, I; Piggott, R; Hurst, I | External Author(s): Carreras, O; Warren, J | JEL Classification: E58, G28 | NIESR Discussion Paper Number: 490

In this paper we incorporate a macroprudential policy model within a semi-structural global macroeconomic model, NiGEM. The existing NiGEM model is expanded for the UK, Germany and Italy¹ to include two macroprudential tools: loan-to-value ratios on mortgage lending and variable bank capital adequacy targets. The former has an effect on the economy via its impact on the housing market while the latter acts on the lending spreads of corporate and households. A systemic risk index that tracks the likelihood of the occurrence of a banking crisis is modelled to establish thresholds at which macroprudential policies should be activated by the authorities. We then show counterfactual scenarios, including a historic dynamic simulation of the subprime crisis and the endogenous response of policy thereto, based on the macroprudential block as well as performing a cost-benefit analysis of macroprudential policies. Conclusions are drawn relating to use of this tool for prediction and policy analysis, as well as some of the limitations and potential further research.

¹ The three EU countries where NiGEM has banking sector models incorporated

Keyword tags: 
macroprudential policy
house prices
credit
systemic risk
macroeconomic modelling
Publication type: 

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