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Financial stability, growth and macroprudential policy

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  • Ma, Chang

Abstract

This paper studies the effect of optimal macroprudential policy in a small open economy model where growth is endogenous. By introducing endogenous growth, this model is able to capture the persistent effect of financial crises on output, which is different from previous literature but consistent with the data. Furthermore, there is a new policy trade-off between cyclical and trend consumption growth. In a calibrated version of the baseline model, I find that the impact of the optimal macroprudential policy on growth and welfare is quantitatively small even if it significantly increases financial stability. I consider two extensions of the model in which the optimal macroprudential policy has a larger impact on growth and welfare: one in which macroprudential policy is jointly used with a growth subsidy that helps reduce the cost of financial crises; and another extension with a direct growth externality.

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  • Ma, Chang, 2020. "Financial stability, growth and macroprudential policy," Journal of International Economics, Elsevier, vol. 122(C).
    • Handle: RePEc:eee:inecon:v:122:y:2020:i:c:s002219961830326x
    DOI: 10.1016/j.jinteco.2019.103259
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    Cited by:

    1. Felipe Benguria & Felipe Saffie & Hidehiko Matsumoto, 2019. "Productivity and Trade Dynamics in Sudden Stops," 2019 Meeting Papers 1378, Society for Economic Dynamics.
    2. Crespo Cuaresma, Jesus & von Schweinitz, Gregor & Wendt, Katharina, 2019. "On the empirics of reserve requirements and economic growth," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 253-274.
    3. Pierre-Richard Agénor & Leonardo Gambacorta & Enisse Kharroubi & Enisse Kharroubi, 2018. "The effects of prudential regulation, financial development and financial openness on economic growth," BIS Working Papers 752, Bank for International Settlements.
    4. Marina Lovchikova & Johannes Matschke, 2021. "Capital Controls and the Global Financial Cycle," Research Working Paper RWP 21-08, Federal Reserve Bank of Kansas City.
    5. Bilge Erten & Anton Korinek & José Antonio Ocampo, 2021. "Capital Controls: Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 59(1), pages 45-89, March.
    6. Chang Ma & John H. Rogers & Sili Zhou, 2019. "The Effect of the China Connect," Finance and Economics Discussion Series 2019-087, Board of Governors of the Federal Reserve System (U.S.).
    7. Nakatani, Ryota, 2020. "Macroprudential policy and the probability of a banking crisis," Journal of Policy Modeling, Elsevier, vol. 42(6), pages 1169-1186.
    8. Ma, Chang & Nguyen, Xuan-Hai, 2021. "Too big to fail and optimal regulation," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 747-758.
    9. Chang Ma, 2020. "Self-regulation versus government regulation: an externality view," Journal of Regulatory Economics, Springer, vol. 58(2), pages 166-183, December.

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    More about this item

    Keywords

    Macroprudential policy; Financial crises; Endogenous growth;
    All these keywords.

    JEL classification:

    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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