Optimal Monetary and Prudential Policies

Abstract

Les documents de travail ne reflètent pas la position du CREST et n'engagent que leurs auteurs. Working papers do not reflect the position of CREST but only the views of the authors.

Integration of Financial Markets in Post Global Financial Crises and Implications for British Financial Sector: Analysis Based on A Panel VAR Model

“…There is also emphasis on the policy measures whether macroeconomic policy measure supported by Williams (2012), Blanchard et al (2010) Mishkin (2011) and Nasir and Soliman (2014) or studies for instance by Angelini et al (2012) Benigno et al (2012) Mishkin (2011) which support the idea of prudential policies. However, the policy debate is infinitely perpetual as there are also arguments against the role of macroeconomic and prudential policies in the stable functioning of financial markets (See Benigno et al 2013Agenor et al (2011 and Borio (2011), Svensson (2012) and Collard et al (2012). Nevertheless, there have been some unconventional instruments of asset purchases (Quantitative Easing or Q.Es) used and there have been changes in the supervisory and institutional architects of the financial system by which we mean formulation of institutions like Financial Policy Committee and Prudential Regulatory Authority (PRA) at the Band of England.…”

Capital Requirements, Risk-Taking and Welfare in a Growing Economy

“…Given Assumption 1, risky investments reduce welfare. To rule out the hypothetical case where the regulator directly forbids risk-taking, suppose that, as in Van den Heuvel (2008, 2016 and Collard et al (2016), banks can hide some risky loans in their portfolio from the regulator. Specifically, suppose that the regulator observes the total amount of loans made by each bank but cannot detect its risky loans up to a given fraction   0 of its safe loans.…”

“…Intuitively, as in Collard et al (2016), the dependence of the spread on the failure probability stems from the fact that making safe loans enables banks to make risky loans-given that hiding the risk associated with these loans is subject to the constraint    ≤    . The spread is decreasing in the productivity of the risky technology (conditional on it not failing) because a higher value of  raises risk-taking incentives for banks.…”

“…These contributions include Agur and Demertzis (2012), Dell'Ariccia et al (2014), Cociuba et al (2016), and Collard et al (2016). Cociuba et al (2016), for instance, argued that low policy rates have conflicting effects on bank risk-taking: on the one hand, they make riskier assets more attractive than safe bonds; on the other, they reduce the amount of safe bonds available for collateralized borrowing in interbank markets-which facilitates reallocation of resources between financial intermediaries in response to new information about the riskiness of their investments.…”

“…As in Van den Heuvel (2008) and Collard et al (2016), banks can make safe or risky loans to entrepreneurs, but the expected return of risky loans is decreasing in the probability of failure. Thus, the model focuses on financial fragility on the asset side of banks' balance sheets.…”