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International Coordination of Macroprudential Policies with Capital Flows and Financial Asymmetries

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Abstract

Lack of coordination for prudential regulation hurts developing economies but benefits advanced economies. We consider a two-country macro model in which countries have limited ability to issue state-contingent contracts in international markets. Both countries have incentives to stabilize their economy by using prudential limits, but the emerging economy depends on the advanced economy to bear global risk. Intermediating global risk requires bearing systemic risk, which financially developed economies are unwilling to bear, preferring financial stability over credit flows. Advanced economies prefer tighter prudential limits than would occur with coordination, to the harm of emerging economies.

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  • William Chen & Gregory Phelan, 2020. "International Coordination of Macroprudential Policies with Capital Flows and Financial Asymmetries," Department of Economics Working Papers 2020-05, Department of Economics, Williams College.
    • Handle: RePEc:wil:wileco:2020-05
    Note: This is a revised version of paper 2017-05
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    File URL: https://web.williams.edu/Economics/wp/ChenPhelanIntCoordMacroPolicies062020.pdf
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    More about this item

    Keywords

    International Capital Flows; Capital Controls; Macroeconomic Instability; Macroprudential Regulation; Policy Coordination; Spillovers; Financial Crises.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • 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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