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A Proposal on Macro-prudential Regulation

  • Carolina Osorio

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    This paper assesses the choice of different regulatory policy instruments for crisis managementand prevention. To this end a two-period, rational expectations, monetary general equilibrium modelwith commercial banks, collateral, securitization and default is contructed in order to explain the2007-2009 U.S. financial crisis. The equilibrium outcome is characterized by a contagion phenomenonthat commences with increased default in the mortgage sector, and then spreads to the rest of thenominal sector of the economy. The resuslts show that in times of financial distress accommodativemonetary policy mitigates housing crises, but it achieves only a partial improvement on financialstability. Regulatory measures are the primary tools to achieve financial stability; capital requirements reduce leverage in the banking sector, and induce banks to internalize (default) losses without taking a toll on the taxpayer; margin requirements prevent excess leverage in the housing and derivatives markets, thus containing the adverse effects of the housing crisis; and, liquidity requirements reduce banks´ exposure to risky assets, thereby promoting lending in times of financial distress and stemming house price deflation.

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    File URL: http://www.banrep.gov.co/sites/default/files/publicaciones/archivos/espe_64_7.pdf
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    Article provided by BANCO DE LA REPÚBLICA - ESPE in its journal ENSAYOS SOBRE POLÍTICA ECONÓMICA.

    Volume (Year): (2011)
    Issue (Month): ()
    Pages:

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    Handle: RePEc:col:000107:009447
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    1. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
    2. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
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