The Conceptual Foundations of Macroprudential Policy : A Roadmap

This paper explores post-Lehman macroprudential regulation by interacting two types of market failures (principal-agent and collective action) with two cognition modes (unconstrained and constrained) in the context of aggregate risk. Four paradigms with orthogonal policy justifications are identifie...

Full description

Bibliographic Details
Main Authors:	de la Torre, Augusto, Ize, Alain
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2013
Subjects:	ACCELERATOR ADVANCED ECONOMIES ADVERSE EFFECTS ADVERSE IMPACT ADVERSE SELECTION AGENCY COSTS ARBITRAGE ASSET PRICE ASSET PRICES BAILOUTS BANK CREDIT BANK FAILURES BANK OF ENGLAND BANK PANICS BANK REGULATION BANKING CRISES BANKING CRISIS BANKING PANICS BORROWING BOUNDED RATIONALITY BUSINESS CYCLE BUSINESS CYCLES CAPITAL REGULATION CAPITAL REQUIREMENTS CENTRAL BANKS COLLATERAL COLLECTIVE ACTION COLLECTIVE ACTION PROBLEMS COMMERCIAL BANKING COMPARATIVE ADVANTAGE COMPARATIVE ADVANTAGES COMPENSATION SYSTEMS CONSUMER PROTECTION COORDINATION FAILURES CREDIT EXPANSION CREDIT POLICIES CREDITORS DEBT DEPOSIT DEPOSIT INSURANCE DEPOSITORS DEVELOPMENT BANK DEVELOPMENT POLICY DISCLOSURE REQUIREMENTS DRIVERS ECONOMETRICS ECONOMIC PERFORMANCE ECONOMIC RESEARCH ECONOMIC SURVEYS ECONOMIC THEORY ECONOMICS EXCESS LIQUIDITY EXPECTED UTILITY EXPOSURE EXTERNALITIES EXTERNALITY FAILURE RESOLUTION FEDERAL RESERVE FEDERAL RESERVE BANK FINANCIAL AUTHORITIES FINANCIAL CONTAGION FINANCIAL CONTRACTS FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL DEVELOPMENT FINANCIAL FRAGILITY FINANCIAL INNOVATION FINANCIAL INSTABILITY FINANCIAL INSTITUTION FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIARIES FINANCIAL MARKET FINANCIAL MARKET PARTICIPANTS FINANCIAL MARKETS FINANCIAL REGULATION FINANCIAL SAFETY NET FINANCIAL SECTOR FINANCIAL STABILITY FINANCIAL STRUCTURE FINANCIAL STUDIES FINANCIAL SYSTEM FINANCIAL SYSTEMS FINANCIAL VOLATILITY GENERAL EQUILIBRIUM GENERAL EQUILIBRIUM ANALYSIS HOLDING INDIVIDUAL MARKET INFORMATION ASYMMETRIES INFORMATION ASYMMETRY INFORMATION PROCESSING INFORMATION TECHNOLOGY INNOVATION INTEREST RATES INTERNATIONAL BANK INTERNATIONAL FINANCE INVESTMENT CHOICES INVESTMENT DECISIONS IRRATIONAL EXUBERANCE LENDER LENDER OF LAST RESORT LIQUID ASSETS LIQUIDITY LIQUIDITY PROBLEMS LIQUIDITY RISK LOAN MACROECONOMIC CONTEXT MACROECONOMIC POLICY MACROECONOMICS MARK-TO-MARKET MARK-TO-MARKET ACCOUNTING MARKET DISCIPLINE MARKET FAILURE MARKET FAILURES MARKET LIQUIDITY MARKET PARTICIPANT MARKET PARTICIPANTS MARKET PLAYERS MARKET PRICES MARKET PRICING MARKET REQUIREMENTS MATURITY MATURITY MISMATCH MONETARY POLICY MORAL HAZARD NEGATIVE EXTERNALITIES PAYMENT SYSTEM PAYMENT SYSTEMS PECUNIARY EXTERNALITIES POLICY RESPONSE POLICY RESPONSES POLITICAL ECONOMY PORTFOLIO PRIVATE CAPITAL PRUDENTIAL REGULATION PRUDENTIAL REQUIREMENTS PUBLIC DEBT PUBLIC GOOD PUBLIC INVESTMENT PUT OPTION RATING AGENCIES REGULATOR REGULATORS REGULATORY FRAMEWORK REGULATORY REQUIREMENTS RESERVE RESERVE REQUIREMENTS RETURN RETURNS RISK MANAGEMENT RISK TAKING SAFETY SAFETY NET SHAREHOLDERS SIDE EFFECTS SOCIAL BENEFITS SOCIAL COSTS SOLVENCY SYSTEMIC RISK SYSTEMIC RISKS TAX TAXATION TRADING UTILITY MAXIMIZATION UTILITY THEORY VOLATILITY WEALTH WHOLESALE FUNDING
Online Access:	http://documents.worldbank.org/curated/en/2013/08/18112903/rhyme-reason-macroprudential-policy-four-guideposts-find-your-bearings-rhyme-reason-macroprudential-policy-four-guideposts-find-your-bearings http://hdl.handle.net/10986/16009

id	okr-10986-16009
recordtype	oai_dc
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English en_US
topic	ACCELERATOR ADVANCED ECONOMIES ADVERSE EFFECTS ADVERSE IMPACT ADVERSE SELECTION AGENCY COSTS ARBITRAGE ASSET PRICE ASSET PRICES BAILOUTS BANK CREDIT BANK FAILURES BANK OF ENGLAND BANK PANICS BANK REGULATION BANKING CRISES BANKING CRISIS BANKING PANICS BORROWING BOUNDED RATIONALITY BUSINESS CYCLE BUSINESS CYCLES CAPITAL REGULATION CAPITAL REQUIREMENTS CENTRAL BANKS COLLATERAL COLLECTIVE ACTION COLLECTIVE ACTION PROBLEMS COMMERCIAL BANKING COMPARATIVE ADVANTAGE COMPARATIVE ADVANTAGES COMPENSATION SYSTEMS CONSUMER PROTECTION COORDINATION FAILURES CREDIT EXPANSION CREDIT POLICIES CREDITORS DEBT DEPOSIT DEPOSIT INSURANCE DEPOSITORS DEVELOPMENT BANK DEVELOPMENT POLICY DISCLOSURE REQUIREMENTS DRIVERS ECONOMETRICS ECONOMIC PERFORMANCE ECONOMIC RESEARCH ECONOMIC SURVEYS ECONOMIC THEORY ECONOMICS EXCESS LIQUIDITY EXPECTED UTILITY EXPOSURE EXTERNALITIES EXTERNALITY FAILURE RESOLUTION FEDERAL RESERVE FEDERAL RESERVE BANK FINANCIAL AUTHORITIES FINANCIAL CONTAGION FINANCIAL CONTRACTS FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL DEVELOPMENT FINANCIAL FRAGILITY FINANCIAL INNOVATION FINANCIAL INSTABILITY FINANCIAL INSTITUTION FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIARIES FINANCIAL MARKET FINANCIAL MARKET PARTICIPANTS FINANCIAL MARKETS FINANCIAL REGULATION FINANCIAL SAFETY NET FINANCIAL SECTOR FINANCIAL STABILITY FINANCIAL STRUCTURE FINANCIAL STUDIES FINANCIAL SYSTEM FINANCIAL SYSTEMS FINANCIAL VOLATILITY GENERAL EQUILIBRIUM GENERAL EQUILIBRIUM ANALYSIS HOLDING INDIVIDUAL MARKET INFORMATION ASYMMETRIES INFORMATION ASYMMETRY INFORMATION PROCESSING INFORMATION TECHNOLOGY INNOVATION INTEREST RATES INTERNATIONAL BANK INTERNATIONAL FINANCE INVESTMENT CHOICES INVESTMENT DECISIONS IRRATIONAL EXUBERANCE LENDER LENDER OF LAST RESORT LIQUID ASSETS LIQUIDITY LIQUIDITY PROBLEMS LIQUIDITY RISK LOAN MACROECONOMIC CONTEXT MACROECONOMIC POLICY MACROECONOMICS MARK-TO-MARKET MARK-TO-MARKET ACCOUNTING MARKET DISCIPLINE MARKET FAILURE MARKET FAILURES MARKET LIQUIDITY MARKET PARTICIPANT MARKET PARTICIPANTS MARKET PLAYERS MARKET PRICES MARKET PRICING MARKET REQUIREMENTS MATURITY MATURITY MISMATCH MONETARY POLICY MORAL HAZARD NEGATIVE EXTERNALITIES PAYMENT SYSTEM PAYMENT SYSTEMS PECUNIARY EXTERNALITIES POLICY RESPONSE POLICY RESPONSES POLITICAL ECONOMY PORTFOLIO PRIVATE CAPITAL PRUDENTIAL REGULATION PRUDENTIAL REQUIREMENTS PUBLIC DEBT PUBLIC GOOD PUBLIC INVESTMENT PUT OPTION RATING AGENCIES REGULATOR REGULATORS REGULATORY FRAMEWORK REGULATORY REQUIREMENTS RESERVE RESERVE REQUIREMENTS RETURN RETURNS RISK MANAGEMENT RISK TAKING SAFETY SAFETY NET SHAREHOLDERS SIDE EFFECTS SOCIAL BENEFITS SOCIAL COSTS SOLVENCY SYSTEMIC RISK SYSTEMIC RISKS TAX TAXATION TRADING UTILITY MAXIMIZATION UTILITY THEORY VOLATILITY WEALTH WHOLESALE FUNDING
spellingShingle	ACCELERATOR ADVANCED ECONOMIES ADVERSE EFFECTS ADVERSE IMPACT ADVERSE SELECTION AGENCY COSTS ARBITRAGE ASSET PRICE ASSET PRICES BAILOUTS BANK CREDIT BANK FAILURES BANK OF ENGLAND BANK PANICS BANK REGULATION BANKING CRISES BANKING CRISIS BANKING PANICS BORROWING BOUNDED RATIONALITY BUSINESS CYCLE BUSINESS CYCLES CAPITAL REGULATION CAPITAL REQUIREMENTS CENTRAL BANKS COLLATERAL COLLECTIVE ACTION COLLECTIVE ACTION PROBLEMS COMMERCIAL BANKING COMPARATIVE ADVANTAGE COMPARATIVE ADVANTAGES COMPENSATION SYSTEMS CONSUMER PROTECTION COORDINATION FAILURES CREDIT EXPANSION CREDIT POLICIES CREDITORS DEBT DEPOSIT DEPOSIT INSURANCE DEPOSITORS DEVELOPMENT BANK DEVELOPMENT POLICY DISCLOSURE REQUIREMENTS DRIVERS ECONOMETRICS ECONOMIC PERFORMANCE ECONOMIC RESEARCH ECONOMIC SURVEYS ECONOMIC THEORY ECONOMICS EXCESS LIQUIDITY EXPECTED UTILITY EXPOSURE EXTERNALITIES EXTERNALITY FAILURE RESOLUTION FEDERAL RESERVE FEDERAL RESERVE BANK FINANCIAL AUTHORITIES FINANCIAL CONTAGION FINANCIAL CONTRACTS FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL DEVELOPMENT FINANCIAL FRAGILITY FINANCIAL INNOVATION FINANCIAL INSTABILITY FINANCIAL INSTITUTION FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIARIES FINANCIAL MARKET FINANCIAL MARKET PARTICIPANTS FINANCIAL MARKETS FINANCIAL REGULATION FINANCIAL SAFETY NET FINANCIAL SECTOR FINANCIAL STABILITY FINANCIAL STRUCTURE FINANCIAL STUDIES FINANCIAL SYSTEM FINANCIAL SYSTEMS FINANCIAL VOLATILITY GENERAL EQUILIBRIUM GENERAL EQUILIBRIUM ANALYSIS HOLDING INDIVIDUAL MARKET INFORMATION ASYMMETRIES INFORMATION ASYMMETRY INFORMATION PROCESSING INFORMATION TECHNOLOGY INNOVATION INTEREST RATES INTERNATIONAL BANK INTERNATIONAL FINANCE INVESTMENT CHOICES INVESTMENT DECISIONS IRRATIONAL EXUBERANCE LENDER LENDER OF LAST RESORT LIQUID ASSETS LIQUIDITY LIQUIDITY PROBLEMS LIQUIDITY RISK LOAN MACROECONOMIC CONTEXT MACROECONOMIC POLICY MACROECONOMICS MARK-TO-MARKET MARK-TO-MARKET ACCOUNTING MARKET DISCIPLINE MARKET FAILURE MARKET FAILURES MARKET LIQUIDITY MARKET PARTICIPANT MARKET PARTICIPANTS MARKET PLAYERS MARKET PRICES MARKET PRICING MARKET REQUIREMENTS MATURITY MATURITY MISMATCH MONETARY POLICY MORAL HAZARD NEGATIVE EXTERNALITIES PAYMENT SYSTEM PAYMENT SYSTEMS PECUNIARY EXTERNALITIES POLICY RESPONSE POLICY RESPONSES POLITICAL ECONOMY PORTFOLIO PRIVATE CAPITAL PRUDENTIAL REGULATION PRUDENTIAL REQUIREMENTS PUBLIC DEBT PUBLIC GOOD PUBLIC INVESTMENT PUT OPTION RATING AGENCIES REGULATOR REGULATORS REGULATORY FRAMEWORK REGULATORY REQUIREMENTS RESERVE RESERVE REQUIREMENTS RETURN RETURNS RISK MANAGEMENT RISK TAKING SAFETY SAFETY NET SHAREHOLDERS SIDE EFFECTS SOCIAL BENEFITS SOCIAL COSTS SOLVENCY SYSTEMIC RISK SYSTEMIC RISKS TAX TAXATION TRADING UTILITY MAXIMIZATION UTILITY THEORY VOLATILITY WEALTH WHOLESALE FUNDING de la Torre, Augusto Ize, Alain The Conceptual Foundations of Macroprudential Policy : A Roadmap
relation	Policy Research Working Paper;No. 6576
description	This paper explores post-Lehman macroprudential regulation by interacting two types of market failures (principal-agent and collective action) with two cognition modes (unconstrained and constrained) in the context of aggregate risk. Four paradigms with orthogonal policy justifications are identified. In the first time consistency paradigm, regulation offsets the moral hazard implications of efficient but time inconsistent post-crisis bailouts. In the second dynamic alignment paradigm, it protects unsophisticated market participants by maintaining principal-agent incentives continuously aligned in the face of aggregate shocks. In the third collective action paradigm, regulation arises in response to the socially inefficient yet rational financial instability resulting from uninternalized externalities. The fourth collective cognition paradigm is grounded on the need to temper the mood swings that arise from bounded rationality or severe cognitive frictions in a rapidly changing, complex and uncertain world. These four rationales give rise to important tensions and trade-offs in the design of macroprudential policy.
format	Publications & Research :: Policy Research Working Paper
author	de la Torre, Augusto Ize, Alain
author_facet	de la Torre, Augusto Ize, Alain
author_sort	de la Torre, Augusto
title	The Conceptual Foundations of Macroprudential Policy : A Roadmap
title_short	The Conceptual Foundations of Macroprudential Policy : A Roadmap
title_full	The Conceptual Foundations of Macroprudential Policy : A Roadmap
title_fullStr	The Conceptual Foundations of Macroprudential Policy : A Roadmap
title_full_unstemmed	The Conceptual Foundations of Macroprudential Policy : A Roadmap
title_sort	conceptual foundations of macroprudential policy : a roadmap
publisher	World Bank, Washington, DC
publishDate	2013
url	http://documents.worldbank.org/curated/en/2013/08/18112903/rhyme-reason-macroprudential-policy-four-guideposts-find-your-bearings-rhyme-reason-macroprudential-policy-four-guideposts-find-your-bearings http://hdl.handle.net/10986/16009
_version_	1764432016288251904
spelling	okr-10986-160092021-06-14T10:29:23Z The Conceptual Foundations of Macroprudential Policy : A Roadmap de la Torre, Augusto Ize, Alain ACCELERATOR ADVANCED ECONOMIES ADVERSE EFFECTS ADVERSE IMPACT ADVERSE SELECTION AGENCY COSTS ARBITRAGE ASSET PRICE ASSET PRICES BAILOUTS BANK CREDIT BANK FAILURES BANK OF ENGLAND BANK PANICS BANK REGULATION BANKING CRISES BANKING CRISIS BANKING PANICS BORROWING BOUNDED RATIONALITY BUSINESS CYCLE BUSINESS CYCLES CAPITAL REGULATION CAPITAL REQUIREMENTS CENTRAL BANKS COLLATERAL COLLECTIVE ACTION COLLECTIVE ACTION PROBLEMS COMMERCIAL BANKING COMPARATIVE ADVANTAGE COMPARATIVE ADVANTAGES COMPENSATION SYSTEMS CONSUMER PROTECTION COORDINATION FAILURES CREDIT EXPANSION CREDIT POLICIES CREDITORS DEBT DEPOSIT DEPOSIT INSURANCE DEPOSITORS DEVELOPMENT BANK DEVELOPMENT POLICY DISCLOSURE REQUIREMENTS DRIVERS ECONOMETRICS ECONOMIC PERFORMANCE ECONOMIC RESEARCH ECONOMIC SURVEYS ECONOMIC THEORY ECONOMICS EXCESS LIQUIDITY EXPECTED UTILITY EXPOSURE EXTERNALITIES EXTERNALITY FAILURE RESOLUTION FEDERAL RESERVE FEDERAL RESERVE BANK FINANCIAL AUTHORITIES FINANCIAL CONTAGION FINANCIAL CONTRACTS FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL DEVELOPMENT FINANCIAL FRAGILITY FINANCIAL INNOVATION FINANCIAL INSTABILITY FINANCIAL INSTITUTION FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIARIES FINANCIAL MARKET FINANCIAL MARKET PARTICIPANTS FINANCIAL MARKETS FINANCIAL REGULATION FINANCIAL SAFETY NET FINANCIAL SECTOR FINANCIAL STABILITY FINANCIAL STRUCTURE FINANCIAL STUDIES FINANCIAL SYSTEM FINANCIAL SYSTEMS FINANCIAL VOLATILITY GENERAL EQUILIBRIUM GENERAL EQUILIBRIUM ANALYSIS HOLDING INDIVIDUAL MARKET INFORMATION ASYMMETRIES INFORMATION ASYMMETRY INFORMATION PROCESSING INFORMATION TECHNOLOGY INNOVATION INTEREST RATES INTERNATIONAL BANK INTERNATIONAL FINANCE INVESTMENT CHOICES INVESTMENT DECISIONS IRRATIONAL EXUBERANCE LENDER LENDER OF LAST RESORT LIQUID ASSETS LIQUIDITY LIQUIDITY PROBLEMS LIQUIDITY RISK LOAN MACROECONOMIC CONTEXT MACROECONOMIC POLICY MACROECONOMICS MARK-TO-MARKET MARK-TO-MARKET ACCOUNTING MARKET DISCIPLINE MARKET FAILURE MARKET FAILURES MARKET LIQUIDITY MARKET PARTICIPANT MARKET PARTICIPANTS MARKET PLAYERS MARKET PRICES MARKET PRICING MARKET REQUIREMENTS MATURITY MATURITY MISMATCH MONETARY POLICY MORAL HAZARD NEGATIVE EXTERNALITIES PAYMENT SYSTEM PAYMENT SYSTEMS PECUNIARY EXTERNALITIES POLICY RESPONSE POLICY RESPONSES POLITICAL ECONOMY PORTFOLIO PRIVATE CAPITAL PRUDENTIAL REGULATION PRUDENTIAL REQUIREMENTS PUBLIC DEBT PUBLIC GOOD PUBLIC INVESTMENT PUT OPTION RATING AGENCIES REGULATOR REGULATORS REGULATORY FRAMEWORK REGULATORY REQUIREMENTS RESERVE RESERVE REQUIREMENTS RETURN RETURNS RISK MANAGEMENT RISK TAKING SAFETY SAFETY NET SHAREHOLDERS SIDE EFFECTS SOCIAL BENEFITS SOCIAL COSTS SOLVENCY SYSTEMIC RISK SYSTEMIC RISKS TAX TAXATION TRADING UTILITY MAXIMIZATION UTILITY THEORY VOLATILITY WEALTH WHOLESALE FUNDING This paper explores post-Lehman macroprudential regulation by interacting two types of market failures (principal-agent and collective action) with two cognition modes (unconstrained and constrained) in the context of aggregate risk. Four paradigms with orthogonal policy justifications are identified. In the first time consistency paradigm, regulation offsets the moral hazard implications of efficient but time inconsistent post-crisis bailouts. In the second dynamic alignment paradigm, it protects unsophisticated market participants by maintaining principal-agent incentives continuously aligned in the face of aggregate shocks. In the third collective action paradigm, regulation arises in response to the socially inefficient yet rational financial instability resulting from uninternalized externalities. The fourth collective cognition paradigm is grounded on the need to temper the mood swings that arise from bounded rationality or severe cognitive frictions in a rapidly changing, complex and uncertain world. These four rationales give rise to important tensions and trade-offs in the design of macroprudential policy. 2013-10-02T16:11:00Z 2013-10-02T16:11:00Z 2013-08 http://documents.worldbank.org/curated/en/2013/08/18112903/rhyme-reason-macroprudential-policy-four-guideposts-find-your-bearings-rhyme-reason-macroprudential-policy-four-guideposts-find-your-bearings http://hdl.handle.net/10986/16009 English en_US Policy Research Working Paper;No. 6576 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research

The Conceptual Foundations of Macroprudential Policy : A Roadmap

Similar Items