Assessing the Gains from International Macroprudential Policy Cooperation

We study the effects of coordinated and noncoordinated macroprudential policies in a core–periphery model that emphasizes the role of international financial centers. After documenting empirically the existence of cross‐country macroprudential spillovers and policy interdependence, we derive a number of results. First, even absent financial frictions, self‐oriented policymakers attempt to manipulate asset prices to their advantage, resulting in higher long‐run capital taxes. Second, financial frictions generate a subsidization bias, as policymakers aim at eliminating the inefficiency wedge between the cost of capital and the deposit rate. Third, self‐oriented national policies imply insufficient subsidies in the long run and wider efficiency gaps in the short run, resulting in substantial gains from cooperation.