Macroprudential Policy Transmission in the Romanian Economy: Evidence from a DSGE Model with a Monopolistic Banking Sector

This study examines the transmission of capital-based macroprudential policy in the Romanian economy using a Dynamic Stochastic General Equilibrium (DSGE) model with a monopolistic banking sector. The need for such research arises from the limited focus on smaller non-euro area economies, which face unique macroeconomic challenges compared to larger economies like the eurozone. The study addresses this gap by adapting a widely recognized DSGE model to reflect the specificities of the Romanian economy, calibrating it with data from Romania’s banking system. Methodologically, the model simulates the effects of macroprudential policies, particularly capital buffer adjustments, on the economy through various shocks. Findings indicate that increasing capital requirements effectively curbs overheating in the housing market and reduces lending. The shock responses tend to have larger amplitudes but shorter durations compared to those observed in eurozone economies. The results suggest that while macroprudential policy is useful for managing economic overheating, its impact is shorter-lived than traditional monetary policy interventions.