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...

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Main Authors:	de la Torre, Augusto, Ize, Alain
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2013
Subjects:	FINANCIAL FRICTIONS INTERNALIZED EXTERNALITIES MACROPRUDENTIAL POLICY MARKET FAILURES RATIONALITY STATE INTERVENTIONS VOLATILITY
Online Access:	http://documents.worldbank.org/curated/en/2013/08/18112899/foundations-macroprudential-regulation-conceptual-roadmap http://hdl.handle.net/10986/16008

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recordtype	oai_dc
spelling	okr-10986-160082021-04-23T14:03:27Z The Foundations of Macroprudential Regulation : A Conceptual Roadmap de la Torre, Augusto Ize, Alain FINANCIAL FRICTIONS INTERNALIZED EXTERNALITIES MACROPRUDENTIAL POLICY MARKET FAILURES RATIONALITY STATE INTERVENTIONS VOLATILITY 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. 2013-10-02T16:07:18Z 2013-10-02T16:07:18Z 2013-08 http://documents.worldbank.org/curated/en/2013/08/18112899/foundations-macroprudential-regulation-conceptual-roadmap http://hdl.handle.net/10986/16008 English en_US Policy Research Working Paper;No. 6575 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English en_US
topic	FINANCIAL FRICTIONS INTERNALIZED EXTERNALITIES MACROPRUDENTIAL POLICY MARKET FAILURES RATIONALITY STATE INTERVENTIONS VOLATILITY
spellingShingle	FINANCIAL FRICTIONS INTERNALIZED EXTERNALITIES MACROPRUDENTIAL POLICY MARKET FAILURES RATIONALITY STATE INTERVENTIONS VOLATILITY de la Torre, Augusto Ize, Alain The Foundations of Macroprudential Regulation : A Conceptual Roadmap
relation	Policy Research Working Paper;No. 6575
description	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.
format	Publications & Research :: Policy Research Working Paper
author	de la Torre, Augusto Ize, Alain
author_facet	de la Torre, Augusto Ize, Alain
author_sort	de la Torre, Augusto
title	The Foundations of Macroprudential Regulation : A Conceptual Roadmap
title_short	The Foundations of Macroprudential Regulation : A Conceptual Roadmap
title_full	The Foundations of Macroprudential Regulation : A Conceptual Roadmap
title_fullStr	The Foundations of Macroprudential Regulation : A Conceptual Roadmap
title_full_unstemmed	The Foundations of Macroprudential Regulation : A Conceptual Roadmap
title_sort	foundations of macroprudential regulation : a conceptual roadmap
publisher	World Bank, Washington, DC
publishDate	2013
url	http://documents.worldbank.org/curated/en/2013/08/18112899/foundations-macroprudential-regulation-conceptual-roadmap http://hdl.handle.net/10986/16008
_version_	1764432013207535616

The Foundations of Macroprudential Regulation : A Conceptual Roadmap

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