Macroprudential policy with convertible debt |
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| Institution: | 1. Institute of Economics, Academia Sinica, 128 Academia Road, Section 2, Taipei, Taiwan;2. Graduate School of Economics, Kobe University, 2-1 Rokodai-cho, Nada-ku, Kobe 657-8501, Japan;3. Institute of Economic Research, Kyoto University, Yoshida Honmachi, Sakyo-ku, Kyoto, 606-850 Japan;1. Department of Finance and Economics, College of Business and Economics, Qatar University, P.O. Box 2713, Qatar;2. Department of Finance and Economics, College of Industrial Management (KFUPM), Saudi Arabia;1. Wheaton College, Department of Business and Economics, 501 College Avenue, Wheaton, IL 60187, USA;2. Universidad de los Andes, Department of Economics, Calle 19A # 1–37 Este, Bloque W., Bogotá, Colombia |
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| Abstract: | This paper studies the effectiveness of countercyclical capital requirements and contingent convertible capital (CoCos) in limiting financial instability, and its associated influence on the real economy. To do this, I augment both features into a standard business cycle framework with an equity market and a banking sector. The model is calibrated to real U.S. data and used for simulations. The findings suggest that a countercyclical capital adequacy rule and CoCos provide an effective dual approach to macroprudential policy. On the one hand, a capital adequacy rule mitigates the build-up of systemic risk through a capital buffer. On the other hand, CoCos are able to reduce the impact of a sudden decline in bank capital. |
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