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Macroprudential policy with leakages

Julien Bengui and Javier Bianchi

Journal of International Economics, 2022, vol. 139, issue C

Abstract: We explore how imperfect regulation enforcement affects the design of optimal macroprudential policy. We study an open economy workhorse model of macroprudential regulation motivated by pecuniary externalities. Our analytical characterization shows that imperfect enforcement generates two opposing effects. While tighter regulation leads to higher borrowing by unregulated agents, a “leakage effect”, mitigating the increase in fragility calls for “squeezing” regulated agents further. Quantitative simulations show that, overall, a macroprudential policy that accounts for the leakages remains successful at mitigating the vulnerability to financial crises.

Keywords: Macroprudential policy; Capital flow management; Regulatory arbitrage; Financial crises; Limited regulation enforcement (search for similar items in EconPapers)
JEL-codes: E58 F32 G28 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Macroprudential Policy with Leakages (2019) Downloads
Working Paper: Macroprudential Policy with Leakages (2018) Downloads
Working Paper: Macroprudential Policy with Leakages (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:139:y:2022:i:c:s0022199622000915

DOI: 10.1016/j.jinteco.2022.103659

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