02092cas a2200253 a 4500 AALejournalIMF021270 230101c9999 xx r poo 0 0eng d 5.00 USD 9781513557786 1018-5941 BD-DhAAL BD-DhAAL Lipinsky, Fabian. Capital Gaps, Risk Dynamics, and the Macroeconomy / Fabian Lipinsky, Mirela Miescu. Washington, D.C. : International Monetary Fund, 2020. 1 online resource (45 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students Motivated by the increasing interest in analyzing the links between the financial sector and the real economy, we develop a macro-financial structural model with two novel features. First, we include idiosyncratic and aggregate risk in a tractable general equilibrium model. This allows us to capture sectoral dynamics and the probabilities of default of both firms and financial intermediaries, and the feedback between them. Second, we introduce the concept of sticky (observed) versus flexible (agents' target) capital. The identified differences between realized and optimal values - the capital gaps of firms and banks - lead financial and business cycles, and cause gaps in credit spreads and asset prices. The model can be used as a signaling device for macroprudential intervention, and to gauge whether macroprudential action was successful ex-post (e.g., whether gaps were closed). For illustration, we show how the analysis of gaps can be applied to the U.S. economy using Bayesian estimation techniques. Mode of access: Internet Miescu, Mirela. IMF Working Papers; Working Paper ; No. 2020/209 Full text available on IMF http://elibrary.imf.org/view/journals/001/2020/209/001.2020.issue-209-en.xml IMF e-Library