To be presented in AEA 2013 Rating Systems and Procyclicality: an Evaluation in a DSGE Framework

This paper introduces a DSGE model that focuses on the modelling of endogenous default and a regulated, active banking sector. One purpose of the paper is to study the impacts of shocks on an economy with nancial frictions. The main nancial friction comes from the combination of default and bank capital requirement. We focus on studying banks' responses in terms of portfolio decisions, capital bu er, dividend distributions and debt repayment to their creditors. Another purpose of the paper is to study di erent impacts of the point-in-time regime and the through-the-cycle regime on the economy. The results point to the conclusion that the preference of banks for certain regimes depends on the type of shocks.