A Semi-Structural Model for Credit Cycle and Policy Analysis

A Semi-Structural Model for Credit Cycle and Policy Analysis – An Application for Luxembourg

By Carlos de Resende, Alexandra Solovyeva, Moez Souissi

July 9, 2024

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Carlos de Resende, Alexandra Solovyeva, and Moez Souissi. A Semi-Structural Model for Credit Cycle and Policy Analysis – An Application for Luxembourg, (USA: International Monetary Fund, 2024) accessed November 21, 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

The paper explores the nexus between the financial and business cycles in a semi-structural New Keynesian model with a financial accelerator, an active banking sector, and an endogenous macroprudential policy reaction function. We parametrize the model for Luxembourg through a mix of calibration and Bayesian estimation techniques. The model features dynamic properties that align with theoretical priors and empirical evidence and displays sensible data-matching and forecasting capabilities, especially for credit indicators. We find that the credit gap, which remained positive during COVID-19 amid continued favorable financial conditions and policy support, had been closing by mid-2022. Model-based forecasts using data up to 2022Q2 and conditional on the October 2022 WEO projections for the Euro area suggest that Luxembourg's business and credit cycles would deteriorate until late 2024. Based on these insights about the current and projected positions in the credit cycle, the model can guide policymakers on how to adjust the macroprudential policy stance. Policy simulations suggest that the weights given to measures of credit-to-GDP and asset price gaps in the macroprudential policy rule should be well-calibrated to avoid unwarranted volatility in the policy response.

Subject: Capital adequacy requirements, Countercyclical capital buffers, Credit, Credit cycles, Financial regulation and supervision, Financial sector policy and analysis, Macroprudential policy, Money

Keywords: Banks, Capital adequacy requirements, Countercyclical capital buffers, Credit, Credit cycle, Credit cycles, Credit demand and supply shock, Credit demand shock, Credit supply shock, Forecasting and simulation, Forecasting capability, Global, IMF working paper 24/140, Impulse response, Luxembourg, Macroprudential policy, Policy simulation

Publication Details

Pages:

47
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/140
Stock No:

WPIEA2024140
ISBN:

9798400281969
ISSN:

1018-5941

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