## Capital Gaps, Risk Dynamics, and the Macroeconomy

_IMF Working Papers, September 25, 2020_

## Source details

**Canonical URL:** [Capital Gaps, Risk Dynamics, and the Macroeconomy](https://www.imf.org/en/publications/wp/issues/2020/09/25/capital-gaps-risk-dynamics-and-the-macroeconomy-49762)

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## Bibliographic details
- Authors: Fabian Lipinsky, Mirela S. Miescu
- Published: September 25, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513557786.001

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### Research focus and model features
- Authors: Fabian Lipinsky, Mirela S. Miescu
- Date: September 25, 2020
- Research objective: Develop a macro-financial structural model to analyze links between the financial sector and the real economy.
- Two novel model features:
  - Inclusion of idiosyncratic and aggregate risk in a tractable general equilibrium model to capture sectoral dynamics, probabilities of default of both firms and financial intermediaries, and the feedback between them.
  - Introduction of sticky (observed) versus flexible (agents’ target) capital, defining capital gaps as the differences between realized and optimal values for firms and banks.

### Key findings and mechanisms
- Capital gaps of firms and banks:
  - Lead financial and business cycles.
  - Cause gaps in credit spreads and asset prices.
- Model applications:
  - Can be used as a signaling device for macroprudential intervention.
  - Can gauge whether macroprudential action was successful ex-post (for example, whether gaps were closed).
- Empirical illustration:
  - The analysis of gaps is applied to the U.S. economy using Bayesian estimation techniques.

### Policy relevance and implications
- Macroprudential signaling:
  - The model provides indicators (capital gaps, credit spread gaps, asset price gaps) that can inform the timing and design of macroprudential interventions.
- Ex-post evaluation:
  - The framework allows assessment of whether policy interventions closed observed capital gaps.

### Subject classification and keywords
- Subject: Credit, Financial crises, Financial statements, Mutual funds, Nonbank financial institutions
- Keywords: adjustment cost, capital gap, capital level, cash flow, FIs capital, risk shock, WP

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- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2020/09/25/capital-gaps-risk-dynamics-and-the-macroeconomy-49762_