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Global lending conditions and international coordination of financial regulation policies

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  • Kharroubi, Enisse

Abstract

Using a model of strategic interactions between two countries, I investigate the gains to international coordination of financial regulation policies, and how these gains depend on global lending conditions. When one region – the core – sets global lending conditions, I show that coordinating regulatory policies makes the two regions better-off relative to the case of no cooperation. Global lending conditions set by the core are typically sub-optimal for the other region – the periphery –. To reduce this cost, the periphery can tighten its regulatory policy. Yet, in doing so, it fails to internalise a cross-border externality: when the periphery tightens its regulatory policy, agents in the core reduce cross-border borrowing, which tightens global lending conditions and hurts the periphery. The cooperative equilibrium can improve on this outcome. Both regions take into account the cross-border externality, leading to larger cross-border borrowing and less sub-optimal lending conditions for the periphery.

Suggested Citation

  • Kharroubi, Enisse, 2023. "Global lending conditions and international coordination of financial regulation policies," Journal of Financial Stability, Elsevier, vol. 69(C).
  • Handle: RePEc:eee:finsta:v:69:y:2023:i:c:s1572308923000840
    DOI: 10.1016/j.jfs.2023.101184
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    More about this item

    Keywords

    Regulatory policy; Global lending conditions; Cross-border borrowing; Cooperation;
    All these keywords.

    JEL classification:

    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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