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Risky Banks and Macro-Prudential Policy for Emerging Economies

Author

Listed:
  • Gabriel Cuadra

    (Banco de Mexico)

  • Victoria Nuguer

    (Inter-American Development Bank)

Abstract

We develop a two-country DSGE model with financial intermediaries to analyze the role of cross-border bank flows in the transmission of a U.S. bank's balance sheet shock to emerging market economies (EMEs). In the model, banks in both countries face an agency problem when borrowing from domestic households. EME banks might also be constrained in borrowing from U.S. banks, what we call risky EME banks. A negative quality of capital shock in the United States generates a global financial crisis. EME's macro-prudential policy that targets non-core liabilities (cross-border bank flows) makes the domestic economy resilient to the volatility of cross-border bank flows and makes EME's households better off. (Copyright: Elsevier)

Suggested Citation

  • Gabriel Cuadra & Victoria Nuguer, 2018. "Risky Banks and Macro-Prudential Policy for Emerging Economies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 125-144, October.
  • Handle: RePEc:red:issued:15-242
    DOI: 10.1016/j.red.2018.05.001
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    1. repec:kap:openec:v:28:y:2017:i:4:d:10.1007_s11079-017-9441-4 is not listed on IDEAS
    2. Ag�nor, Pierre-Richard & Gambacorta, Leonardo & Kharroubi, Enisse & Lombardo, Giovanni & Pereira da Silva, Luiz A., 2017. "The International Dimensions of Macroprudential Policies," CEPR Discussion Papers 12108, C.E.P.R. Discussion Papers.
    3. Shigeto Kitano & Kenya Takaku, 2017. "Capital Controls, Macroprudential Regulation,and the Bank Balance Sheet Channel," Discussion Paper Series DP2017-18, Research Institute for Economics & Business Administration, Kobe University, revised Jun 2018.
    4. Pierre-Richard Agénor & Pengfei Jia, 2017. "Macroprudential Policy Coordination in a Currency Union'," Centre for Growth and Business Cycle Research Discussion Paper Series 235, Economics, The Univeristy of Manchester.
    5. Morais, Bernardo & Peydro, Jose Luis & Ruiz, Claudia, 2015. "The International Bank Lending Channel of Monetary Policy Rates and QE: Credit Supply, Reach-for-Yield, and Real Effects," International Finance Discussion Papers 1137, Board of Governors of the Federal Reserve System (U.S.).
    6. Shigeto Kitano & Kenya Takaku, 2017. "Capital Controls and Financial Frictions in a Small Open Economy," Open Economies Review, Springer, vol. 28(4), pages 761-793, September.

    More about this item

    Keywords

    Cross-border bank flows; Emerging market economies; Financial frictions; Macro-prudential policy; DSGE models;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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