Achieving financial stability during a liquidity crisis: a multi-objective approach

Abstract

Following the financial crisis of 2007, regulators undertook an ample process of redefinition of the necessary objectives to achieve financial stability. Nevertheless, it is highly likely that the achievement of a specific stability goal precludes the possibility of pursuing other stability goals during financial turmoil. Once considered in this way, financial stability can be immediately translated into a multi-objective decision-making problem. In this paper, we analyze some possible trade-offs faced by a regulator in order to preserve financial stability during a liquidity crisis. To this end, we employ a model of liquidity cascades applied to credit networks and we determine the best among different policy options relying on the MOORA (multi-objective optimization on the basis of ratio analysis) method.