Next, we suppose that the guarantee programs do not need to hold risk capital individually; instead, the government holds a certain amount of risk capital for the programs as a group, also based on the 99 percent level TVaR. Therefore, the total amount of capital is
Under all four scenarios, we assume that risk capital is set at the 99 percent level TVaR, and that both the risk-free rate and the cost of capital rate are 2 percent per year.
The top panel of Table 1 reports the simulated capital and premium for each program and the total TVaR. The stand-alone scenario best matches current FCRA methods whereby each program is priced independently.
The former study examines the effects of fiscal policy shocks on output in Germany within linear VAR and non-linear TVAR (threshold vector autoregression) model.
TVAR model with two regimes appears to be the most appropriate option because it best fits the character of the business cycles--it clearly distinguishes between positive and negative output gap.