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Why macropru can end up being procyclical

Author

Listed:
  • Danielsson, Jon
  • Macrae, Robert
  • Tsomocos, Dimitrios P.
  • Zigrand, Jean-Pierre

Abstract

Discretionary macroprudential policies aim to be countercyclical by adjusting risk-taking across the financial cycle. This column argues that the opposite effect may happen in certain cases. Depending on how regulators measure risk and how they react, the eventual outcome may well be procyclical, with serious unintended consequences.

Suggested Citation

  • Danielsson, Jon & Macrae, Robert & Tsomocos, Dimitrios P. & Zigrand, Jean-Pierre, 2016. "Why macropru can end up being procyclical," LSE Research Online Documents on Economics 70711, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:70711
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    File URL: http://eprints.lse.ac.uk/70711/
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    References listed on IDEAS

    as
    1. Jon Danielsson & Marcela Valenzuela & Ilknur Zer, 2018. "Learning from History: Volatility and Financial Crises," The Review of Financial Studies, Society for Financial Studies, vol. 31(7), pages 2774-2805.
    2. Sudipto Bhattacharya & Charles A.E. Goodhart & Dimitrios P. Tsomocos & Alexandros P. Vardoulakis, 2019. "A Reconsideration of Minsky’s Financial Instability Hypothesis," Chapters, in: Financial Regulation and Stability, chapter 6, pages 158-200, Edward Elgar Publishing.
    3. Sudipto Bhattacharya & Charles A.E. Goodhart & Dimitrios P. Tsomocos & Alexandros P. Vardoulakis, 2015. "A Reconsideration of Minsky's Financial Instability Hypothesis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(5), pages 931-973, August.
    4. Jon Danielsson & Hyun Song Shin & Jean-Pierre Zigrand, 2012. "Endogenous Extreme Events and the Dual Role of Prices," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 111-129, July.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Olszak, Małgorzata & Kowalska, Iwona, 2022. "Does bank competition matter for the effects of macroprudential policy on the procyclicality of lending?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).

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    More about this item

    Keywords

    macropru; risk-taking; financial cycle; macroprudential; pro cyclical;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General

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