Credit Risk in a DSGE Model

Abstract

This paper develops an open-economy model with banks operating under monopolistic competition, two types of credit subject to credit risk—corporate and mortgage—and Basel-type capital requirements. The model is calibrated and estimated using Bayesian methods and Peruvian data. The estimated model is then used for historical shock decompositions, variance decompositions, and impulse response analysis following monetary and fiscal shocks. It also serves to evaluate the effects of regulatory frameworks such as the IRB approaches under Basel II and III.