Macroprudential Policy with Leakages

Julien Bengui and Javier Bianchi

No 754, Working Papers from Federal Reserve Bank of Minneapolis

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 undermine the effectiveness of macroprudential taxes but do not necessarily call for weaker interventions. A quantitative analysis of the model suggests that aggregate welfare gains and reductions in the severity and frequency of financial crises remain, on average, largely unaffected by even significant leakages.

Keywords: Macroprudential policy; Regulatory arbitrage; Financial crises; Limited regulation enforcement (search for similar items in EconPapers)
JEL-codes: D62 E32 E44 F32 F41 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2018-09-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (23)

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Related works:
Journal Article: Macroprudential policy with leakages (2022)
Working Paper: Macroprudential Policy with Leakages (2019)
Working Paper: Macroprudential Policy with Leakages (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:754

DOI: 10.21034/wp.754

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