National Interests, Spillovers and Macroprudential Coordination

Johannes Matschke

No RWP 21-13, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper presents a simple two-region banking model of liquidity mismatch to study the strategic interactions between national regulators. I show that banks hold insufficient liquidity, which has repercussions for other banks in an international financial market. The model justifies coordinated prudential liquidity regulation due to an international fire-sale externality. However, I theoretically and empirically argue that domestically oriented regulators from jurisdictions with a smaller banking sector do not internalize the global benefits of regulation and therefore do not adhere to international standards. The model justifies capital controls if countries do not cooperate. Although capital controls improve the welfare of regulating economies, they also align the interest of free-riding countries with international regulation.

Keywords: International liquidity regulation; Capital controls; Welfare (search for similar items in EconPapers)
JEL-codes: D62 F36 F42 G15 G21 (search for similar items in EconPapers)
Pages: 71
Date: 2021-11-17
New Economics Papers: this item is included in nep-fdg
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Citations: View citations in EconPapers (1)

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DOI: 10.18651/RWP2021-13

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