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Financial Regulation in General Equilibrium

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  • Charles Goodhart

    ()

  • Anil K Kashyap
  • Dimitrios Tsomocos

    ()

  • Alexandros Vardoulakis

    ()

Abstract

This paper explores how different types of financial regulation could combat many of the phenomena that were observed in the financial crisis of 2007 to 2009. The primary contribution is the introduction of a model that includes both a banking system and a “shadow banking system” that each help households finance their expenditures. Households sometimes choose to default on their loans, and when they do this triggers forced selling by the shadow banks. Because the forced selling comes when net worth of potential buyers is low, the ensuing price dynamics can be described as a fire sale. The proposed framework can assess five different policy options that officials have advocated for combating defaults, credit crunches and fire sales,namely: limits on loan to value ratios, capital requirements for banks, liquidity coverage ratios for banks, dynamic loan loss provisioning for banks, and margin requirements on repurchase agreements used by shadow banks. The paper aims to develop some general intuition about the interactions between the tools and to determine whether they act as complements and substitutes.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp702AXA9.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp702.

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Date of creation: Mar 2012
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Handle: RePEc:fmg:fmgdps:dp702

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Web page: http://www.lse.ac.uk/fmg/

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  1. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
  2. Charles Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A model to analyse financial fragility," LSE Research Online Documents on Economics 24703, London School of Economics and Political Science, LSE Library.
  3. Dimitrios P. Tsomocos, 2003. "Equilibrium Analysis, Banking and Financial Instability," OFRC Working Papers Series 2003fe08, Oxford Financial Research Centre.
  4. Douglas W. Diamond & Raghuram G. Rajan, 1999. "A Theory of Bank Capital," NBER Working Papers 7431, National Bureau of Economic Research, Inc.
  5. Tobias Adrian & Hyun Song Shin, 2009. "Money, Liquidity, and Monetary Policy," American Economic Review, American Economic Association, vol. 99(2), pages 600-605, May.
  6. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  7. Franklin Allen & Douglas Gale, 2005. "From Cash-in-the-Market Pricing to Financial Fragility," Journal of the European Economic Association, MIT Press, MIT Press, vol. 3(2-3), pages 535-546, 04/05.
  8. Pradeep Dubey & John Geanakoplos, 2006. "Determinacy with nominal assets and outside money," Economic Theory, Springer, vol. 27(1), pages 79-106, 01.
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Citations

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Cited by:
  1. Jordà, Òscar & Schularick, Moritz & Taylor, Alan M., 2011. "When Credit Bites Back: Leverage, Business Cycles, and Crises," CEPR Discussion Papers 8678, C.E.P.R. Discussion Papers.
  2. Charles A. E. Goodhart & Anil K Kashyap & Dimitrios P. Tsomocos & Alexandros P. Vardoulakis, 2013. "An Integrated Framework for Analyzing Multiple Financial Regulations," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 109-144, January.
  3. Constâncio, Vítor, 2014. "The European Crisis and the Role of the Financial System," Journal of Macroeconomics, Elsevier, vol. 39(PB), pages 250-259.
  4. cho, hyejin, 2014. "bank capital regulation model," MPRA Paper 54365, University Library of Munich, Germany.
  5. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary leverage cycles and financial stability," Staff Reports 567, Federal Reserve Bank of New York.
  6. Ono, Arito & Uchida, Hirofumi & Udell, Gregory & Uesugi, Iichiro, 2013. "A Close Look at Loan-To-Value Ratios: Evidence from the Japanese Real Estate Market," Working Paper Series 19, Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University.
  7. Adrian, Tobias & Boyarchenko, Nina, 2014. "Liquidity policies and systemic risk," Staff Reports 661, Federal Reserve Bank of New York.
  8. Otaviano Canuto & Swati R. Ghosh, 2013. "Dealing with the Challenges of Macro Financial Linkages in Emerging Markets," World Bank Publications, The World Bank, number 16202.
  9. Tobias Adrian & Daniel Covitz & Nellie J. Liang, 2013. "Financial stability monitoring," Staff Reports 601, Federal Reserve Bank of New York.
  10. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary Leverage Cycles and Financial Stability," Working Papers 2012-010, Becker Friedman Institute for Research In Economics.
  11. Hartmann, Philipp & Hubrich, Kirstin & Kremer, Manfred & Tetlow, Robert J., 2013. "Melting down: Systemic financial instability and the macroeconomy," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80487, Verein für Socialpolitik / German Economic Association.
  12. Tobias Adrian, 2012. "Discussion of “An Integrated Framework for Multiple Financial Regulations”," Staff Reports 583, Federal Reserve Bank of New York.

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