In this paper, this study aims to investigate the role of capital-based macroprudential policy in stabilizing domestic business cycles in a developing country, using Kazakhstan as a case study. Despite the widespread adoption of countercyclical capital buffers (CCyB) across jurisdictions, the academic literature has largely concentrated on advanced economies. The empirical evidence remains inconclusive, frequently yielding mixed policy implications and thus offering limited operational guidance for emerging markets.
The authors develop a small open-economy, commodity-exporting New Keynesian DSGE model with a banking sector. The model features a heterogeneous banking industry, financial frictions and endogenous default risk, while macroprudential regulation is introduced through CCyB.
The authors find that CCyB cushions the economy by supporting credit supply during negative external shocks, thereby mitigating recessions. During positive productivity shocks, CCyB restrains excessive credit expansion and moderates economic overheating, promoting sustainable growth and financial stability. Overall, CCyB smooths both downturns and upturns, strengthens banking sector resilience and reduces shock amplification through the financial system.
This study contributes to the existing literature on the effectiveness of macroprudential policy instruments in small open economies in several important ways. First, the authors extend the framework of \cite{martinez2020} by testing and building on relevant findings on bank heterogeneity and the transmission of macroprudential policy tools to both the real and financial sectors of Kazakhstan’s economy. Second, the results show that the implementation of the CCyB is particularly effective in mitigating external shocks stemming from fluctuations in key commodity export prices, which are a central source of macrofinancial volatility in developing countries. This finding provides new evidence on the stabilizing role of countercyclical capital regulation in commodity-dependent economies, where external terms-of-trade shocks can quickly translate into credit and exchange rate volatility. Third, this study makes an important contribution to the empirical measurement of the credit-to-GDP gap in Kazakhstan, establishing a reliable empirical benchmark for future research and macroprudential policy analysis.
