Macroprudential Policy with Leakages

Julien Bengui and Javier Bianchi

No 25048, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The outreach of macroprudential policies is likely limited in practice by imperfect regulation enforcement, whether due to shadow banking, regulatory arbitrage, or other regulation circumvention schemes. We study how such concerns affect the design of optimal regulatory policy in a workhorse model in which pecuniary externalities call for macroprudential taxes on debt, but with the addition of a novel constraint that financial regulators lack the ability to enforce taxes on a subset of agents. While regulated agents reduce risk taking in response to debt taxes, unregulated agents react to the safer environment by taking on more risk. These leakages undermine the effectiveness of macruprudential taxes but do not necessarily call for weaker interventions. A quantitative analysis of the model suggests that aggregate welfare gains and reductions in the severity and frequency of financial crises remain, on average, largely unaffected by even significant leakages.

JEL-codes: E0 F0 F3 F32 F34 (search for similar items in EconPapers)
Date: 2018-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
Note: EFG IFM ME
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Citations: View citations in EconPapers (38)

Published as Julien Bengui & Javier Bianchi, 2022. "Macroprudential policy with leakages," Journal of International Economics, .

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Related works:
Journal Article: Macroprudential policy with leakages (2022)
Working Paper: Macroprudential Policy with Leakages (2019)
Working Paper: Macroprudential Policy with Leakages (2018)
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