Abstract
The standard macro(prudential) models focus on externalities and treat all prudential instruments as alternative, but equivalent, forms of Pigouvian taxes. This paper explicitly models individual banks'risk choices and shows that different prudential instruments affect banks'risk-taking incentives differently. Thus, conflicts may arise between the micro and macro prudential stance.
Highlights
The active use of prudential instruments to control credit volumes and allocations fell into disgrace in the 1990s, when the regulatory pendulum swung toward ...nancial liberalization.[1]
We look at three macroprudential measures that have received particular attention in the recent literature: a tax t on deposits, a tax on loans levied on borrowers,[7] and a minimum capital requirement set equal to a fraction 2 [0; 1] of total lending
According to the current wisdom, prudential regulation should be thought of as an additional instrument in the hands of policymakers to avoid the build up of excessive risk along the business cycle. Such a view is supported by many recent contributions that incorporate ...nancial ampli...cation e¤ects in open macro models, and study how ‘macroprudential’taxes can help in coping with ...nancial externalities.[10]
Summary
The active use of prudential instruments to control credit volumes and allocations fell into disgrace in the 1990s, when the regulatory pendulum swung toward ...nancial liberalization.[1]. In (necessarily) stylized DSGE models, taxes on debt, capital, and liquidity requirements end up being equivalent forms of Pigouvian taxation that can e¤ectively deal with the negative overborrowing externalities.[4] This raises the question of how robust such results are–that is whether in a more micro-founded model such equivalence results still hold. This is the question we address in this paper. The channel they emphasize is the decrease in leverage, which, in our model, can only be achieved through tougher capital requirements
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