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Macroprudential policy in the lab

Paul Gortner and Baptiste Massenot

No 239, SAFE Working Paper Series from Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt

Abstract: Higher capital ratios are believed to improve system-wide financial stability through three main channels: (i) higher loss-absorption capacity, (ii) lower moral hazard, (iii) stabilization of the financial cycle if capital ratios are increased during good times. We examine these mechanisms in a laboratory asset market experiment with indebted participants. We find support for the loss-absorption channel: higher capital ratios reduce the bankruptcy rate. However, we do not find support for the moral hazard channel. Higher capital ratios (insignificantly) increase asset price bubbles, an aggregate measure of excessive risk-taking. Additional evidence suggests that bankruptcy aversion explains this surprising result. Finally, the evidence supports the idea that higher capital ratios in good times stabilize the financial cycle.

JEL-codes: G28 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-exp and nep-mac
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:239

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