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National Interests, Spillovers and Macroprudential Coordination

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Abstract

This paper presents a simple two-region banking model of liquidity mismatch to study the strategic interactions between national regulators. I show that banks hold insufficient liquidity, which has repercussions for other banks in an international financial market. The model justifies coordinated prudential liquidity regulation due to an international fire-sale externality. However, I theoretically and empirically argue that domestically oriented regulators from jurisdictions with a smaller banking sector do not internalize the global benefits of regulation and therefore do not adhere to international standards. The model justifies capital controls if countries do not cooperate. Although capital controls improve the welfare of regulating economies, they also align the interest of free-riding countries with international regulation.

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  • Johannes Matschke, 2021. "National Interests, Spillovers and Macroprudential Coordination," Research Working Paper RWP 21-13, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:93597
    DOI: 10.18651/RWP2021-13
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    Cited by:

    1. Sergio Florez-Orrego, 2021. "Money Matters: Global banks, safe assets and monetary autonomy," Documentos CEDE 019153, Universidad de los Andes – Facultad de Economía – CEDE.

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    More about this item

    Keywords

    International liquidity regulation; Capital controls; Welfare;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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