Assessing the Gains from International Macroprudential Policy Cooperation

Abstract

We study the effects of coordinated and noncoordinated macroprudential policies in a core-periphery model that emphasizes the role of international financial centers. After documenting empirically the existence of crosscountry macroprudential spillovers and policy interdependence, we derive a number of results. First, even absent financial frictions, self-oriented policymakers attempt to manipulate asset prices to their advantage, resulting in higher long-run capital taxes. Second, financial frictions generate a subsidization bias, as policymakers aim at eliminating the inefficiency wedge between the cost of capital and the deposit rate. Third, self-oriented national This paper was previously circulated under the title of "The international dimensions of macroprudential policies" by the same group of authors. The paper has undergone substantial revisions, warranting a change of title. We are grateful to our discussants for helping us refocus our analysis. We are thankful to

International coordination of macroprudential policies with capital flows and financial asymmetries

“…Our result that tighter policy improves stability is consistent with the evidence in Boar et al (2017) who find that countries that more frequently use macroprudential tools, other things being equal, experience stronger and less volatile GDP growth. Our result that tighter policy provides strategic incentives for another country to tighten is consistent with the evidence in Agénor et al (2018) who find that countries tend to set macroprudential policy more actively if their "neighbors" are more active.…”

“…Similar to our analysis, Agénor et al (2018) consider a linearized core-periphery model when financial intermediation is subject to frictions and show that policies trade off mitigating the shortrun consequences of the financial accelerator (and spillovers) and the long-run effects of higher costs of capital. Our paper is closely related to Davis and Devereux (2019), who analyze an asymmetric two-country economy where one country faces domestic financial frictions and the other does not.…”

Global banking, financial spillovers and macroprudential policy coordination

“…Among the few contributions available, based explicitly on a game‐theoretic approach, are Agénor et al . (2021) and Chen and Phelan (2021). Agénor et al .…”

“…Agénor et al . (2021) study the effects of coordinated and independent macroprudential policies in a model with financial frictions, as in Gertler and Karadi (2011), and where global banks in a core region lend domestically and to banks in the periphery 4…”

“…(2016) and Agénor et al . (2021) solve instead for the open‐loop (Ramsey) optimal policy with commitment. In such conditions, each regulator chooses an instrument path at the beginning of time—as opposed to a reaction function under a closed‐loop equilibrium—taking as given the whole future path of the other regulator's instrument.…”