## A Semi-Structural Model for Credit Cycle and Policy Analysis – An Application for Luxembourg

_IMF Working Papers, July 9, 2024_

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## Bibliographic details
- Authors: Carlos de Resende, Alexandra Solovyeva, Moez Souissi
- Published: July 9, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400281969.001

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### Model framework
- Semi-structural New Keynesian model with:
  - a financial accelerator,
  - an active banking sector,
  - an endogenous macroprudential policy reaction function.
- Designed to explore the nexus between the financial and business cycles.

### Parametrization and estimation
- Parametrized for Luxembourg through a mix of calibration and Bayesian estimation techniques.
- Model features dynamic properties that align with theoretical priors and empirical evidence.
- Displays sensible data-matching and forecasting capabilities, especially for credit indicators.

### Key findings and forecasts
- The credit gap remained positive during COVID-19 amid continued favorable financial conditions and policy support.
- The credit gap had been closing by mid-2022.
- Model-based forecasts using data up to 2022Q2 and conditional on the October 2022 WEO projections for the Euro area suggest that Luxembourg's business and credit cycles would deteriorate until late 2024.

### Policy simulations and recommendations
- The model can guide policymakers on how to adjust the macroprudential policy stance based on current and projected positions in the credit cycle.
- Policy simulations suggest:
  - The weights given to measures of credit-to-GDP and asset price gaps in the macroprudential policy rule should be well-calibrated.
  - Proper calibration is needed to avoid unwarranted volatility in the policy response.

### Subject focus and keywords
- Subjects: Capital adequacy requirements; Countercyclical capital buffers; Credit; Credit cycles; Financial regulation and supervision; Financial sector policy and analysis; Macroprudential policy; Money.
- Keywords: banks; Capital adequacy requirements; Countercyclical capital buffers; Credit; credit cycle; Credit cycles; credit demand and supply shock; credit demand shock; credit supply shock; forecasting and simulation; forecasting capability; Global; IMF working paper 24/140; impulse response; Luxembourg; Macroprudential policy; Policy simulation.

*Source: A Semi-Structural Model for Credit Cycle and Policy Analysis – An Application for Luxembourg, by Carlos de Resende, Alexandra Solovyeva, and Moez Souissi, July 9, 2024. https://www.imf.org/en/publications/wp/issues/2024/07/09/a-semi-structural-model-for-credit-cycle-and-policy-analysis-an-application-for-luxembourg-551447*

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_Source: https://www.imf.org/en/publications/wp/issues/2024/07/09/a-semi-structural-model-for-credit-cycle-and-policy-analysis-an-application-for-luxembourg-551447_