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Cross-Border Regulatory Spillovers and Macroprudential Policy Coordination

Author

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  • Pierre-Richard Agénor
  • Timothy P. Jackson
  • Luiz Pereira da Silva

Abstract

A two-region, core-periphery model with financial frictions, imperfect financial integration, and cross-border banking is used to assess the gains from international macroprudential policy coordination. A core global bank lends to its affiliates in the periphery and banks are subject to a risk-sensitive capital regulatory regime. An expansionary monetary policy in the core is used to illustrate how lending costs, countercyclical capital buffers (which respond to real credit growth), and regulatory arbitrage affect cross-border bank capital flows, under both economies and diseconomies of scope in domestic and foreign lending by the global bank. Welfare gains are calculated for three policy regimes: independent policies (Nash), coordination, and reciprocity–where capital ratios set in the core region are also imposed in the periphery. Coordination generates significant gains at the level of the world economy, and these gains increase with the degree of international financial integration. However, their distribution tends to be highly asymmetric. Under certain circumstances, reciprocity may generate higher gains than independent policies for the world economy, despite the reciprocating jurisdiction (the periphery) being invariably worse off.

Suggested Citation

  • Pierre-Richard Agénor & Timothy P. Jackson & Luiz Pereira da Silva, 2020. "Cross-Border Regulatory Spillovers and Macroprudential Policy Coordination," Working Papers 202028, University of Liverpool, Department of Economics.
  • Handle: RePEc:liv:livedp:202028
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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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