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Financial stability, growth and macroprudential policy

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  • Ma, Chang

Abstract

This paper studies the effect of optimal macroprudential policy in a small open economy model where growth is endogenous. By introducing endogenous growth, this model is able to capture the persistent effect of financial crises on output, which is different from previous literature but consistent with the data. Furthermore, there is a new policy trade-off between cyclical and trend consumption growth. In a calibrated version of the baseline model, I find that the impact of the optimal macroprudential policy on growth and welfare is quantitatively small even if it significantly increases financial stability. I consider two extensions of the model in which the optimal macroprudential policy has a larger impact on growth and welfare: one in which macroprudential policy is jointly used with a growth subsidy that helps reduce the cost of financial crises; and another extension with a direct growth externality.

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  • Ma, Chang, 2020. "Financial stability, growth and macroprudential policy," Journal of International Economics, Elsevier, vol. 122(C).
    • Handle: RePEc:eee:inecon:v:122:y:2020:i:c:s002219961830326x
    DOI: 10.1016/j.jinteco.2019.103259
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    4. Alessandro Rebucci & Chang Ma, 2019. "Capital Controls: A Survey of the New Literature," NBER Working Papers 26558, National Bureau of Economic Research, Inc.
    5. Benguria, Felipe & Matsumoto, Hidehiko & Saffie, Felipe, 2022. "Productivity and trade dynamics in sudden stops," Journal of International Economics, Elsevier, vol. 139(C).
    6. Matschke, Johannes & Lovchikova, Marina, 2022. "Capital Controls and the Global Financial Cycle," VfS Annual Conference 2022 (Basel): Big Data in Economics 264039, Verein für Socialpolitik / German Economic Association.
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    10. Dario Bonciani & David Gauthier & Derrick Kanngiesser, 2023. "Slow Recoveries, Endogenous Growth and Macro-prudential Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 698-715, December.
    11. Pierre-Richard Agénor & Leonardo Gambacorta & Enisse Kharroubi & Enisse Kharroubi, 2018. "The effects of prudential regulation, financial development and financial openness on economic growth," BIS Working Papers 752, Bank for International Settlements.
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    13. Marina Lovchikova & Johannes Matschke, 2021. "Capital Controls and the Global Financial Cycle," Research Working Paper RWP 21-08, Federal Reserve Bank of Kansas City.
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    16. Chang Ma & John H. Rogers & Sili Zhou, 2019. "The Effect of the China Connect," Finance and Economics Discussion Series 2019-087, Board of Governors of the Federal Reserve System (U.S.).
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    More about this item

    Keywords

    Macroprudential policy; Financial crises; Endogenous growth;
    All these keywords.

    JEL classification:

    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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