Regulating Credit Booms from Micro and Macro Perspectives

Toshiaki Ogawa

MPRA Paper from University Library of Munich, Germany

Abstract: This study examines how micro- and macro-prudential policies work and interact with each other over the credit cycles using a dynamic general equilibrium model of financial intermediaries. Micro-prudential policies restrict the excess risk-taking of individual institutions, while taking real interest rates (prices) as given. By contrast, macro prudential policies control the aggregate credit supplied (equilibrium outcome) by internalizing prices or the general equilibrium effect. The proposed model indicates that: (i) micro-prudential policy alone cannot completely remove inefficient credit cycles; (ii) when macro-prudential policy is conducted jointly with the micro-prudential one, policymakers can improve banks' credit quality and remove inefficient credit cycles completely without sacrificing the total credit supply; and (iii) the contributions of micro and macro-prudential policies to the improvement in social welfare are roughly comparable.

Keywords: Micro-prudential policy; Macro-prudential policy; Moral hazard problem; General equilibrium; Inefficient credit cycles (search for similar items in EconPapers)
JEL-codes: E0 E44 G01 G21 G28 (search for similar items in EconPapers)
Date: 2022-01-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fdg and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:111378

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