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Macroprudential Policy with Leakages

Author

Listed:
  • Bengui, Julien
  • Bianchi, Javier
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 do undermine the effectiveness of macruprudential taxes, yet they do not necessarily call for weaker interventions. Quantitatively, we find that a well-designed macroprudential policy that accounts for leakages remains successful at mitigating the vulnerability to financial crises.

Suggested Citation

  • Bengui, Julien & Bianchi, Javier, 2019. "Macroprudential Policy with Leakages," CEPR Discussion Papers 13951, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13951
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Macroprudential policy; Capital flow management; Regulatory arbitrage; Financial crises; Limited regulation enforcement;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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