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A Proposal on Macro-prudential Regulation


  • Carolina Osorio



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.

Suggested Citation

  • Carolina Osorio, 2011. "A Proposal on Macro-prudential Regulation," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 29(64), pages 235-287, July.
  • Handle: RePEc:col:000107:009447

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    References listed on IDEAS

    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," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 865-888.
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    More about this item


    general equilibrium; securitization; collateral; default; monetary policy; regulation.;

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services


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