## The Volatility Costs of Procyclical Lending Standards: An Assessment Using a Dsge Model

_IMF Working Papers, March 1, 2009_

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## Bibliographic details
- Authors: Silvia Sgherri, Bertrand Gruss
- Published: March 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451871821.001

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### Overview
- Authors: Silvia Sgherri, Bertrand Gruss
- Date: March 1, 2009
- Core question: How does procyclicality in lending standards (via borrowing limits) amplify asset-price overreactions to shocks, and what are the stabilization gains from policies that smooth cyclical swings in credit conditions?
- Context: Two-country DSGE model with financial frictions; builds on Aiyagari and Gertler (1999) framework.

### Model and Approach
- Two-country DSGE model incorporating financial frictions and procyclical borrowing limits.
- Focus on channels through which borrowing-limit procyclicality reinforces asset-price “overreaction” to shocks.
- Quantifies stabilization gains from policies that reduce cyclical swings in credit conditions.
- Emphasizes cross-border spillovers and effects on financially constrained economies.

### Key Findings
- Procyclicality in borrowing limits reinforces the “overreaction” of asset prices to shocks described by Aiyagari and Gertler (1999).
- In financially constrained economies, policies that smooth lending standards yield sizable volatility reductions in:
  - equity prices
  - investment
  - external imbalances
- Presence of cross-border spillovers increases the stabilization gains from smoothing credit conditions.

### Policy Implications
- Banking regulation that attenuates procyclicality in lending standards by influencing banks’ capital buffers can reduce systemic risk and dampen boom-and-bust cycles in credit markets.
- Policies aimed at smoothing cyclical swings in credit conditions can deliver tangible volatility reduction in key macrofinancial variables, particularly in financially constrained economies and when cross-border linkages exist.

### Publication and Identifiers
- Series: Working Paper No. 2009/035
- Issue: 035
- Volume: 2009
- Pages: 37
- DOI: https://doi.org/10.5089/9781451871821.001
- Stock No: WPIEA2009035
- ISBN: 9781451871821
- ISSN: 1018-5941

*IMF Working Paper: "The Volatility Costs of Procyclical Lending Standards: An Assessment Using a Dsge Model" by Silvia Sgherri and Bertrand Gruss, March 1, 2009.*

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