Regulating Credit Booms from Micro and Macro Perspectives

Ogawa, Toshiaki (2022): Regulating Credit Booms from Micro and Macro Perspectives.

Abstract

This study examines how micro- and macro-prudential policies work and interact with each other over the credit cycles using a dynamic general equilibrium model of financial intermediaries. Micro-prudential policies restrict the excess risk-taking of individual institutions, while taking real interest rates (prices) as given. By contrast, macro prudential policies control the aggregate credit supplied (equilibrium outcome) by internalizing prices or the general equilibrium effect. The proposed model indicates that: (i) micro-prudential policy alone cannot completely remove inefficient credit cycles; (ii) when macro-prudential policy is conducted jointly with the micro-prudential one, policymakers can improve banks' credit quality and remove inefficient credit cycles completely without sacrificing the total credit supply; and (iii) the contributions of micro and macro-prudential policies to the improvement in social welfare are roughly comparable.

• Item Type: MPRA Paper
• Language: English
• Keywords: Micro-prudential policy; Macro-prudential policy; Moral hazard problem; General equilibrium; Inefficient credit cycles
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation

References

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