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Global lending conditions and international coordination of financial regulation policies

Enisse Kharroubi

No 962, BIS Working Papers from Bank for International Settlements

Abstract: Using a model of strategic interactions between two countries, I investigate the gains to international coordination of financial regulation policies, and how these gains depend on global lending conditions. When global lending conditions are determined non-cooperatively, I show that coordinating regulatory policies leads to a Pareto improvement relative to the case of no cooperation. In the non-cooperative equilibrium, one region - the core - determines global lending conditions, leaving the other region - the periphery - in a sub-optimal situation. The periphery then tightens regulatory policy to reduce the cost of sub-optimal lending conditions. Yet, in doing so, it fails to internalise a cross-border externality: tightening regulatory policy in one region limits ex ante borrowing in the other region, which increases the cost of sub-optimal lending conditions for the periphery. The equilibrium with cooperative regulatory policies can then improve on this outcome as both regions take into account the cross-border externality and allow for larger ex ante borrowing, ending in a lower cost of suboptimal lending conditions for the periphery.

Keywords: regulatory policy; global financial conditions; international coordination (search for similar items in EconPapers)
JEL-codes: D53 D62 F38 F42 G18 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2021-08
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-gth, nep-ifn, nep-isf, nep-opm and nep-reg
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