Capital Gaps, Risk Dynamics, and the Macroeconomy

September 25, 2020

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Format: Chicago

Fabian Lipinsky, and Mirela S. Miescu Capital Gaps, Risk Dynamics, and the Macroeconomy, (USA: International Monetary Fund, 2020) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Motivated by the increasing interest in analyzing the links between the financial sector and the real economy, we develop a macro-financial structural model with two novel features. First, we include idiosyncratic and aggregate risk in a tractable general equilibrium model. This allows us to capture sectoral dynamics and the probabilities of default of both firms and financial intermediaries, and the feedback between them. Second, we introduce the concept of sticky (observed) versus flexible (agents’ target) capital. The identified differences between realized and optimal values — the capital gaps of firms and banks — lead financial and business cycles, and cause gaps in credit spreads and asset prices. The model can be used as a signaling device for macroprudential intervention, and to gauge whether macroprudential action was successful ex-post (e.g., whether gaps were closed). For illustration, we show how the analysis of gaps can be applied to the U.S. economy using Bayesian estimation techniques.

Subject: Credit, Financial crises, Financial statements, Mutual funds, Nonbank financial institutions

Keywords: Adjustment cost, Capital gap, Capital level, Cash flow, FIs capital, Risk shock, WP

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/209
Stock No:

WPIEA2020209
ISBN:

9781513557786
ISSN:

1018-5941

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