Evaluating Macroprudential Policy with Financial Friction DSGE Model,” mimeo

In general, macroprudential policy refers to a set of regulatory policy imposed mainly on financial institutions, for macroeconomic purposes. In this paper, I aim to provide a DSGE framework to assess issues regarding macroprudential policy. Based on New Keynesian setup, I embedded financial accelerator mechanism by Bernanke et al. (1999) in both business and household lending contract and designed bank capital func-tioning as a buffer stock. Then I evaluate the effectiveness of various macroprudential policy rules given different shocks, using a policy evaluation measure in terms of in-flation and output volatility. It turns out the target capital ratio reacting to output deviation performs the best, as it can reduce the volatility of inflation and output in most cases. LTV rule on household lending is in general not effective, as credit shifts away to the business sector