Sudden Floods, Macroprudential Regulation and Stability in an Open Economy
We develop a dynamic stochastic model of a middle-income, small open economy with a two-level banking intermediation structure, a risk-sensitive regulatory capital regime, and imperfect capital mobility. Firms borrow from a domestic bank and the bank borrows on world capital markets, in both cases subject to an endogenous premium. A sudden flood in capital flows generates an expansion in credit and activity, and asset price pressures. Countercyclical regulation, in the form of a Basel III-type rule based on real credit gaps, is effective at promoting macroeconomic stability (defined in terms of the volatility of a weighted average of inflation and the output gap) and financial stability (defined in terms of the volatility of a composite index of the nominal exchange rate and house prices). However, because the gain in terms of reduced volatility may exhibit diminishing returns, a countercyclical regulatory rule may need to be supplemented by other, more targeted, macroprudential instruments.
Year of publication: |
2012
|
---|---|
Authors: | Agénor, Pierre-Richard ; Alper, K. ; Silva, L. Pereira da |
Institutions: | School of Economics, University of Manchester |
Saved in:
freely available
Saved in favorites
Similar items by person
-
'Sudden Floods, Macroprudential Regulation and Stability in an Open Economy'
Agénor, Pierre-Richard, (2014)
-
'Sudden Floods, Macroprudential Regulation and Stability in an Open Economy'
Agénor, Pierre-Richard, (2015)
-
Capital requirements and business cycles with credit market imperfections
Agénor, Pierre-Richard, (2009)
- More ...