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The Macroprudential Toolkit

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  • Anil K Kashyap
  • Richard Berner
  • Charles A E Goodhart

Abstract

Most treatments of financial regulation worry about threats to the banking system and the economy from defaults or credit crunches. This paper argues that the recent crisis points to fire sales through capital markets as another source of financial and economic instability. Accounting for fire sales implies several changes to the standard approach. First, if there are three channels of instability, then three regulatory tools are needed to deliver stability. Second, if only a single capital tool and a single liquidity tool are available, then there is a risk that using them pushes activity into the shadow banking system. Third, liquidity requirements on the asset side of bank balance sheets are conceptually different from liquidity requirements on the liability side. The paper starts with a review of the recent theoretical work on fire sales that form the building blocks for a next generation of models of the financial system. A summary of some evidence suggesting that fire sales were present in the crisis is offered. Next, the paper outlines a general equilibrium framework that can be used to think about a financial system in which default, credit crunches, and fire sales are all possible. The paper concludes with a discussion of the regulatory options and some speculation on how such a framework could be extended.

Suggested Citation

  • Anil K Kashyap & Richard Berner & Charles A E Goodhart, 2011. "The Macroprudential Toolkit," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(2), pages 145-161, June.
  • Handle: RePEc:pal:imfecr:v:59:y:2011:i:2:p:145-161
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    Cited by:

    1. repec:spr:empeco:v:53:y:2017:i:4:d:10.1007_s00181-016-1175-4 is not listed on IDEAS
    2. Gabriel Jiménez & Steven Ongena & José-Luis Peydró & Jesús Saurina, 2017. "Macroprudential Policy, Countercyclical Bank Capital Buffers, and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments," Journal of Political Economy, University of Chicago Press, vol. 125(6), pages 2126-2177.
    3. Tatiana Gaelle Yongoua Tchikanda, 2017. "Systemic risk and individual risk: A trade-off?," EconomiX Working Papers 2017-16, University of Paris Nanterre, EconomiX.
    4. Douglas J. Elliott & Greg Feldberg & Andreas Lehnert, 2013. "The history of cyclical macroprudential policy in the United States," Finance and Economics Discussion Series 2013-29, Board of Governors of the Federal Reserve System (U.S.).
    5. repec:eee:ecofin:v:43:y:2018:i:c:p:141-157 is not listed on IDEAS
    6. repec:eee:finsta:v:36:y:2018:i:c:p:322-335 is not listed on IDEAS
    7. Gete, Pedro & Gómez, Juan-Pedro, 2015. "Compensation contracts and fire sales," Journal of Financial Stability, Elsevier, vol. 18(C), pages 154-171.
    8. repec:eee:finsta:v:29:y:2017:i:c:p:92-105 is not listed on IDEAS
    9. Bennani, T. & Després, M. & Dujardin, M. & Duprey, T. & Kelber, A., 2014. "Macroprudential framework:key questions applied to the French case," Occasional papers 9, Banque de France.
    10. repec:eme:jespps:jes-09-2015-0159 is not listed on IDEAS
    11. Knot, K., 2014. "Governance of macroprudential policy," Financial Stability Review, Banque de France, issue 18, pages 25-32, April.
    12. repec:clh:resear:v:8:y:2015:i:34 is not listed on IDEAS

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