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Growth and Welfare Effects of Macroprudential Regulation

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  • Pierre-Richard Agénor

Abstract

This paper studies the growth and welfare effects of macroprudential regulation in an overlapping generations model of endogenous growth with banking and agency costs. Indivisible investment projects combine with informational imperfections to create a double moral hazard problem à la Holmström-Tirole and a role for bank monitoring. When the optimal monitoring intensity is endogenously determined, an increase in the required reserve ratio (motivated by systemic risk considerations) has conflicting effects on investment and growth. On the one hand, requiring banks to put away a fraction of the deposits that they receive reduces the supply of loanable funds. On the other, a higher required ratio raises incentives to save and mitigates banks' incentives to monitor, thereby lowering monitoring costs and freeing up resources to increase lending. In addition, it may mitigate the systemic risk externality associated with excessive leverage. This trade-off can be internalized by choosing the required reserve ratio that maximizes growth and welfare. However, the risk of disintermediation means that in practice financial supervision may also need to be strengthened, and the perimeter of regulation broadened, if the optimal ratio is relatively high.

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  • Pierre-Richard Agénor, 2016. "Growth and Welfare Effects of Macroprudential Regulation," Centre for Growth and Business Cycle Research Discussion Paper Series 218, Economics, The University of Manchester.
    • Handle: RePEc:man:cgbcrp:218
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    Cited by:

    1. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2021. "Capital requirements, risk-taking and welfare in a growing economy," Journal of Regulatory Economics, Springer, vol. 60(2), pages 167-192, December.
    2. Ahnert, Toni & Forbes, Kristin & Friedrich, Christian & Reinhardt, Dennis, 2021. "Macroprudential FX regulations: Shifting the snowbanks of FX vulnerability?," Journal of Financial Economics, Elsevier, vol. 140(1), pages 145-174.
    3. Ms. Juliana Dutra Araujo & Manasa Patnam & Ms. Adina Popescu & Mr. Fabian Valencia & Weijia Yao, 2020. "Effects of Macroprudential Policy: Evidence from Over 6,000 Estimates," IMF Working Papers 2020/067, International Monetary Fund.
    4. Ananou, Foly & Chronopoulos, Dimitris K. & Tarazi, Amine & Wilson, John O.S., 2021. "Liquidity regulation and bank lending," Journal of Corporate Finance, Elsevier, vol. 69(C).
    5. Agénor, Pierre-Richard & Bayraktar, Nihal, 2023. "Capital requirements and growth in an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    6. Rauber, Tom & Ritschel, Paul, 2024. "Banking competition and capital dependence of the production sector: Growth and welfare implications," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 676-698.
    7. Kozlovtceva, Irina & Penikas, Henry & Petreneva, Ekaterina & Ushakova, Yulia, 2022. "Macroprudential policy efficiency in Russia: Assessment for the uncollateralized consumer loans," Emerging Markets Review, Elsevier, vol. 52(C).
    8. Neanidis, Kyriakos C., 2019. "Volatile capital flows and economic growth: The role of banking supervision," Journal of Financial Stability, Elsevier, vol. 40(C), pages 77-93.

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