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Macroprudential Policy with Leakages

Julien Bengui and Javier Bianchi ()

No 13951, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The outreach of macroprudential policies is likely limited in practice by imperfect regulation enforcement, whether due to shadow banking, regulatory arbitrage, or other regulation circumvention schemes. We study how such concerns affect the design of optimal regulatory policy in a workhorse model in which pecuniary externalities call for macroprudential taxes on debt, but with the addition of a novel constraint that financial regulators lack the ability to enforce taxes on a subset of agents. While regulated agents reduce risk taking in response to debt taxes, unregulated agents react to the safer environment by taking on more risk. These leakages do undermine the effectiveness of macruprudential taxes, yet they do not necessarily call for weaker interventions. Quantitatively, we find that a well-designed macroprudential policy that accounts for leakages remains successful at mitigating the vulnerability to financial crises.

Keywords: capital flow management; financial crises; limited regulation enforcement; macroprudential policy; regulatory arbitrage (search for similar items in EconPapers)
JEL-codes: E58 F32 G28 (search for similar items in EconPapers)
Date: 2019-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Working Paper: Macroprudential Policy with Leakages (2018) Downloads
Working Paper: Macroprudential Policy with Leakages (2018) Downloads
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