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Rules, Discretion, and Macro-Prudential Policy

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  • Itai Agur
  • Sunil Sharma

Abstract

The paper examines the implementation of macro-prudential policy. Given the coordination, flow of information, analysis, and communication required, macro-prudential frameworks will have weaknesses that make it hard to implement policy. And dealing with the political economy is also likely to be challenging. But limiting discretion through the formulation of macro-prudential rules is complicated by the difficulties in detecting and measuring systemic risk. The paper suggests that oversight is best served by having a strong baseline regulatory regime on which a time-varying macro-prudential policy can be added as conditions warrant and permit.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/65.

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Length: 32
Date of creation: 08 Mar 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/65

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Related research

Keywords: Macroprudential Policy; Monetary policy; Political economy; Financial systems; Financial risk; rules; decision makers; regulations; regulatory framework; regulatory regime; regulatory reform; regulatory responsibilities; board member; regulatory departments; risk analysis; legal framework; economic activity; insurance premiums; institutional framework; institutional incentives;

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References

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  1. Morris, Charles & Hoenig, Thomas, 2011. "Restructuring the Banking System to Improve Safety and Soundness," MPRA Paper 47614, University Library of Munich, Germany, revised Dec 2012.
  2. Andrei Shleifer & Robert W. Vishny, 2010. "Fire Sales in Finance and Macroeconomics," NBER Working Papers 16642, National Bureau of Economic Research, Inc.
  3. Luigi Zingales & Oliver Hart, 2009. "A New Capital Regulation For Large Financial Institutions," Working Papers, Fondazione Eni Enrico Mattei 2009.124, Fondazione Eni Enrico Mattei.
  4. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2007. "Network models and financial stability," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(6), pages 2033-2060, June.
  5. Michal Kowalik, 2011. "Countercyclical capital regulation: should bank regulators use rules or discretion?," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q II.
  6. Richard J. Rosen, 2002. "Is three a crowd? competition among regulators in banking," Proceedings, Federal Reserve Bank of Chicago 906, Federal Reserve Bank of Chicago.
  7. Reza Siregar, 2011. "Macro-Prudential Approaches to Banking Regulation : Perspectives of Selected Asian Central Banks," Finance Working Papers 23211, East Asian Bureau of Economic Research.
  8. Alan D. Morrison, 2011. "Systemic risks and the 'too-big-to-fail' problem'," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 27(3), pages 498-516.
  9. Aikman, David & Alessandri, Piergiorgio & Eklund, Bruno & Gai, Prasanna & Kapadia, Sujit & Martin, Elizabeth & Mora, Nada & Sterne, Gabriel & Willison, Matthew, 2009. "Funding liquidity risk in a quantitative model of systemic stability," Bank of England working papers, Bank of England 372, Bank of England.
  10. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
  11. Anat Admati & Martin Hellwig, 2013. "The Bankers' New Clothes: What's Wrong with Banking and What to Do about It," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 9929.
  12. Masciandaro, Donato & Quintyn, Marc & Taylor, Michael W., 2008. "Inside and outside the central bank: Independence and accountability in financial supervision: Trends and determinants," European Journal of Political Economy, Elsevier, Elsevier, vol. 24(4), pages 833-848, December.
  13. Goodhart, Charles & Schoenmaker, Dirk, 1995. "Should the Functions of Monetary Policy and Banking Supervision Be Separated?," Oxford Economic Papers, Oxford University Press, vol. 47(4), pages 539-60, October.
  14. Ignazio Angeloni & Ester Faia, 2009. "A Tale of Two Policies: Prudential Regulation and Monetary Policy with Fragile Banks," Kiel Working Papers 1569, Kiel Institute for the World Economy.
  15. Gianni De Nicoló & Giovanni Favara & Lev Ratnovski, 2012. "Externalities and Macroprudential Policy," IMF Staff Discussion Notes 12/05, International Monetary Fund.
  16. Erlend Nier & Luis Ignacio Jácome & Jacek Osinski & Pamela Madrid, 2011. "Towards Effective Macroprudential Policy Frameworks," IMF Working Papers 11/250, International Monetary Fund.
  17. Inci Ötker & Aditya Narain & Anna Ilyina & Jay Surti, 2011. "The Too-Important-to-Fail Conundrum," IMF Staff Discussion Notes 11/12, International Monetary Fund.
  18. Charles Goodhart, 2011. "The Macro-Prudential Authority: Powers, Scope and Accountability," FMG Special Papers, Financial Markets Group sp203, Financial Markets Group.
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Citations

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Cited by:
  1. Donato Masciandaro & Marc Quintyn, 2013. "The Evolution of Financial Supervision: the Continuing Search for the Holy Grail," SUERF 50th Anniversary Volume Chapters, SUERF - The European Money and Finance Forum, SUERF - The European Money and Finance Forum.
  2. Itai Agur & Maria Demertzis, 2013. "Leaning Against the Wind and the Timing of Monetary Policy," IMF Working Papers 13/86, International Monetary Fund.
  3. Itai Agur, 2014. "Bank Risk Within and Across Equilibria," IMF Working Papers 14/116, International Monetary Fund.
  4. Rita Basto, 2013. "A Macro-prudential Policy for Financial Stability," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department, Banco de Portugal, Economics and Research Department.

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