Modeling General-Equilibrium Macroeconomic Stress Scenarios … · Role of General Equilibrium...
Transcript of Modeling General-Equilibrium Macroeconomic Stress Scenarios … · Role of General Equilibrium...
Modeling General-Equilibrium Macroeconomic Stress Scenarios in MATLAB
Jaromír BenešInternational Monetary Fund
MATLAB Computational Finance ConferenceMay 2015
Macroprudential Policy…Is What?
§ Narrow versus broader scope§ Broad policy objectives• Minimize incidence of balance sheet crises• Limit disruptions to key financial services
§ Key elements in macroprudential analysis• Tail-risk distress scenarios • Feedback between balance sheets and real economy• Possibility of severe nonlinearities
§ Models to support macroprudential policy
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Plan of Presentation
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Policymaking Perspective
Modeling Perspective
Programming Perspective
Simulation Experiment
POLICYMAKING PERSPECTIVE
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Assess risks
Macroprudential Policy Exercise
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Design macro(-‐economic/-‐financial) stress scenario(s)• Slow-‐burn (low-‐frequency) shocks and risks• Unlikely yet plausible scenarios with large impact
Evaluate impact of scenario(s)• Resilience of sectoral balance sheets• Feedback between financial and real
sectorsCommunicate with policy makers• Consider possible policy responses
Communicate to public• Regular Financial Stability Reports
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General Equilibrium Model Framework
Structural models
Sectoralanalysis
Time series analysis
CCA
Spreadsheet scenarios
Empirical estimates (PD, LGD, EAD, etc)
Financial stability analysis
Real economy and monetary policy analysis
Role of General Equilibrium Models
§ Integrate all pieces of information§ Balance sheet consistency across sectors and time§ Facilitate internal communication
(explicit assumptions, most critical assumptions)§ Make process accountable§ Make external communication transparent, credible§ Model-based scenario analysis, not accurate
probabilistic predictions
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Limitations…
§ Fundamental uncertainty§ Nonlinear feedback§ Corridor stability§ Estimation and backtesting difficult in crisis modeling• Distress episodes are few and far apart• Each has a different cause• Need to evaluate international evidence
è Common variety of macro models not well-suited
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MODELING PERSPECTIVE
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Macro Model with Credit Risk
Real economy§ Relatively standard
(DSGE) structure§ Monetary economy§ Optimizing agents with
finite (short) planning horizons
§ Mixed expectations
Financial sector§ Credit risk on loan
books§ Asymptotic single factor
risk model§ Advanced IRB to model
regulatory capital constraints
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Rest of w
orldBank
capital
Structure of Model
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Loan portfolio
Resident deposits
Nonresiddeposits
Bank capital
Other assets
Banking sector
Producers
Exporters
Households
Real economy
Exports and imports
Bank capital
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Loan portfolio
Resident deposits
Nonresiddeposits
Bank capital
Other assets
Banking sector
Producers
Exporters
Households
Real economy
Exports and imports
Bank capital
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Loan portfolio
Resident deposits
Nonresiddeposits
Bank capital
Other assets
Banking sector
Producers
Exporters
Households
Real economy
Exports and imports
Demand for Deposits
Δt = Rt−1Dt−1− RL ,t−1Lt−1+NLt
Δt = φ PC ,tCt + PI ,tIt +κ PH ,tHt"#
$%
Bank capital
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Loan portfolio
Resident deposits
Nonresiddeposits
Bank capital
Other assets
Banking sector
Producers
Exporters
Households
Real economy
Exports and imports
Producers
Exporters
Households
Real economy
Exports and imports
Individual Bank Loans
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Bank capital
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Loan portfolio
Resident deposits
Nonresiddeposits
Bank capital
Other assets
Banking sectorRL ,ti Lti > kexp ut+1
i( )PH ,t+1Hti ⇒ default
RL ,ti 1− λ Φ
logRL ,ti Lti
k PH ,tHti − E t log
PH ,t+1PH ,t
#$%
&'(
σ
)
*
+++
,
-
.
.
.
#
$
%%%
&
'
(((= Rt*
Bank capital
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Loan portfolio
Resident deposits
Nonresiddeposits
Bank capital
Other assets
Banking sector
Producers
Exporters
Households
Real economy
Exports and imports
Bank Capital Regulation
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Bank capital
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Loan portfolio
Resident deposits
Nonresiddeposits
Other assets
Banking sector
Producers
Exporters
Households
Real economy
Exports and imports
Bank capital
Eti
Lti≥1−RL ,ti
Rt1− λht
i q( )#$
%&
hti q( ) =Φ
Φ−1 pdti( )−Φ−1 q( ) ρ
1− ρ
#
$
%%%
&
'
(((
PROGRAMMING PERSPECTIVE
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IRIS Toolbox
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60+ classes, 30+ packages, 2,300+ functionswww.iris-‐toolbox.com
Structural modeling (DSGE)
MV time series analysis
Time series and database
management
ReportingDocumentation
Model Related Classes and Packages
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@economy
@agent @stock
@stocklike
@flow
@flowlike
@model
@userdataobj @getsetobj @fragileobj
@modelobj
@preparser @theparser
@estimateobj
+logdist @poster
@systempriors
+irisopt
@hlastsyst @hdataobj
@namedmat
Building Model Equations
§ Two types of equations• Behavioral rules• Stock-flow and other identities
§ Behavioral rules• Optimizing principles
• Rules of thumb• Empirical equations
§ Stock-flow identities• Logical structure of the model
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Transactions Flow Matrix
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Households Producers Exporters Banks Central Bank Rest of world Σ
Tra
nsac
tion
flow
s
Cur
rent
acc
oun
t
Consumption −PC×C PC×C 0
Wage bill W×N −W×NY −W×NX 0
Imports −PM×MY −PM×MX PM×M 0
Exports PX×X −PX×X 0
Distrib surplus producers Π −Π 0
Distrib surplus banks −Γ Γ 0
Distrib surplus CB Ω −Ω 0
Deposit interest RD(0)×D(0) −RD(0)×D(0) 0
Loan interest −RL(0)×L(0) RL(0)×L(0) 0
Loan loss L(0)[1+RL(0)]×UL −L(0)[1+RL(0)]×UL 0
CB liquidity surplus interest R(0)×B(0) −R(0)×B(0) 0
Net foreign liabs interest −RF(0)×F(0) RF(0)×F(0) 0
Cap
ital a
cco
unt Net acquisition of housing −PH×ΔH 0
Chng in deposits −ΔD ΔD 0
Chng in loans ΔL −ΔL 0
Chng in CB liquidity surplus −ΔB ΔB 0
Chng in foreign liabs ΔF −ΔF 0
Σ 0 0 0 0 0 0
Budget constraints
Market clearing
Net Worth Matrix
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Households Producers Exporters Banks Central Bank Rest of world
Cha
nge
in n
et w
ort
h
Opening net worth VH0 0 0 VB(0) VC(0) VR(0)
Tra
nsac
tio
n ch
ng Net acquisition of housing PH×ΔHChng in deposits ΔD −ΔDChng in loans −ΔL ΔLChng in CB liquidity surplus ΔB −ΔBChng in foreign liabs −ΔF ΔF
Rev
al Revaluation of housing ΔPH×H(0)Revaluation of net foreign liabs
J×F(0)
Closing net worth VH 0 0 VB VC VR
Laws of motion for net worth (equity)
Delegated agents
Stock-Flow Builder
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Stock-Flow Builder
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Stock-Flow Builder
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Behavioral Equations (Regexp Parser)
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SIMULATION EXPERIMENT
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House Price Bubble and Burst
House price growth
Risk perceptions
down
Easier cheaper credit
Irrational expectations
Consumption, real economy
House Price Bubble and Burst
§ Irrational expectations• Sequence of shocks
§ Burst of the bubble• Unexpected event• House prices go down to “fundamentals”
• Painful deleveraging in both real and financial sector
§ Re-simulate with loan-to-value caps• Inequality constraint in households decision• Complementary slackness translated into min(…)
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