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Financial Regulation in General Equilibrium

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  • Charles A.E. Goodhart
  • Anil K Kashyap
  • Dimitrios P. Tsomocos
  • Alexandros P. 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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17909.

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Date of creation: Mar 2012
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Handle: RePEc:nbr:nberwo:17909

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References

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  1. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  2. 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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Cited by:
  1. Oscar Jorda & Moritz Schularick & Alan Taylor, 2012. "When Credit Bites Back: Leverage, Business Cycles and Crises," Working Papers 1224, University of California, Davis, Department of Economics.
  2. 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.
  3. Tobias Adrian & Daniel Covitz & Nellie J. Liang, 2013. "Financial stability monitoring," Staff Reports 601, Federal Reserve Bank of New York.
  4. cho, hyejin, 2014. "bank capital regulation model," MPRA Paper 54365, University Library of Munich, Germany.
  5. 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.
  6. 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, January.
  7. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary leverage cycles and financial stability," Staff Reports 567, Federal Reserve Bank of New York.
  8. Adrian, Tobias & Boyarchenko, Nina, 2014. "Liquidity policies and systemic risk," Staff Reports 661, Federal Reserve Bank of New York.

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