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Financial stability: To Regulate or Not? A public choice inquiry

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Abstract

The paper takes the stand that the central banks as financial regulators have their own interest in imposing more regulations. It models the institutional behaviour for the central bank and government using the Indirect Inference testing and estimation method as it finds a set of coefficients of the model that can generate the actual observed behaviour for the US. The paper establishes that good monetary policy can reduce instability. Regulation at worse destabilises the economy and at best contributes little to stabilise the economy. After the financial crisis, financial regulations were too severe and thus actually increased instability.

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  • Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2018. "Financial stability: To Regulate or Not? A public choice inquiry," Cardiff Economics Working Papers E2018/4, Cardiff University, Cardiff Business School, Economics Section.
  • Handle: RePEc:cdf:wpaper:2018/4
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    1. Barth,James R. & Caprio,Gerard & Levine,Ross, 2008. "Rethinking Bank Regulation," Cambridge Books, Cambridge University Press, number 9780521709309, November.
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    5. Tayler, William J. & Zilberman, Roy, 2016. "Macroprudential regulation, credit spreads and the role of monetary policy," Journal of Financial Stability, Elsevier, vol. 26(C), pages 144-158.
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    8. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April.
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    11. Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2016. "Monetarism rides again? US monetary policy in a world of Quantitative Easing," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 44(C), pages 85-102.
    12. Kim, Daesik & Santomero, Anthony M, 1988. " Risk in Banking and Capital Regulation," Journal of Finance, American Finance Association, vol. 43(5), pages 1219-1233, December.
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    17. Alan S. Blinder, 2010. "It’s Broke, Let’s Fix It: Rethinking Financial Regulation," International Journal of Central Banking, International Journal of Central Banking, vol. 6(34), pages 277-330, December.
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    Cited by:

    1. Lyu, Juyi & Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2021. "Macroprudential regulation in the post-crisis era: Has the pendulum swung too far?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    2. Patrick Minford & Zhirong Ou & Zheyi Zhu, 2021. "Can a small New Keynesian model of the world economy with risk‐pooling match the facts?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 1993-2021, April.

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    More about this item

    Keywords

    DSGE; Regulations; Financial Stability; Monetary Policy;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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