The conceptual foundations of macroprudential policy: a roadmap

Alain Ize (alain.ize@gmail.com) and Augusto de la Torre

No 6576, Policy Research Working Paper Series from The World Bank

Abstract: This paper explores post-Lehman macroprudential regulation by interacting two types of market failures (principal-agent and collective action) with two cognition modes (unconstrained and constrained) in the context of aggregate risk. Four paradigms with orthogonal policy justifications are identified. In the first time consistency paradigm, regulation offsets the moral hazard implications of efficient but time inconsistent post-crisis bailouts. In the second dynamic alignment paradigm, it protects unsophisticated market participants by maintaining principal-agent incentives continuously aligned in the face of aggregate shocks. In the third collective action paradigm, regulation arises in response to the socially inefficient yet rational financial instability resulting from uninternalized externalities. The fourth collective cognition paradigm is grounded on the need to temper the mood swings that arise from bounded rationality or severe cognitive frictions in a rapidly changing, complex and uncertain world. These four rationales give rise to important tensions and trade-offs in the design of macroprudential policy.

Keywords: Labor Policies; Debt Markets; Banks&Banking Reform; Financial Intermediation; Emerging Markets (search for similar items in EconPapers)
Date: 2013-08-01
New Economics Papers: this item is included in nep-cba and nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://documents.worldbank.org/curated/en/875291468128697576/pdf/WPS6576.pdf (application/pdf)

Related works:
Journal Article: The Conceptual Foundations of Macroprudential Policy: A Roadmap (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:6576

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi (ryazigi@worldbank.org).