The Foundations of Macroprudential Regulation : A Conceptual Roadmap
This paper examines the conceptual foundations of macroprudential policy by reviewing the literature on financial frictions from a policy perspective that systematically links state interventions to market failures. The method consists in gradually...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2013/08/18112899/foundations-macroprudential-regulation-conceptual-roadmap http://hdl.handle.net/10986/16008 |
| Summary: | This paper examines the conceptual
foundations of macroprudential policy by reviewing the
literature on financial frictions from a policy perspective
that systematically links state interventions to market
failures. The method consists in gradually incorporating
into the Arrow-Debreu world a variety of frictions and
sources of aggregate volatility and combining them along
three basic dimensions: purely idiosyncratic vs. aggregate
volatility, full vs. bounded rationality, and internalized
vs. uninternalized externalities. The analysis thereby
obtains eight "domains," four of which include
aggregate volatility, hence call for macroprudential policy
variants grounded on largely orthogonal rationales. Two of
them emerge even assuming that externalities are
internalized: one aims at offsetting the public moral hazard
implications of (efficient but time inconsistent)
post-crisis policy interventions, the other at maintaining
principal-agent incentives continuously aligned along the
cycle. Allowing for uninternalized externalities justifies
two additional types of macroprudential policy, one aimed at
aligning private and social interests, the other at
tempering mood swings. Choosing a proper regulatory path is
complicated by the fact that the relevance of frictions is
likely to be state-dependent and that different frictions
motivate different (and often conflicting) policies. |
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