nep-reg New Economics Papers
on Regulation
Issue of 2011‒06‒11
nine papers chosen by
Oleg Eismont
Russian Academy of Sciences

  1. Macroprudential Approach to Regulation-Scope and Issues By Gopinath, Shyamala
  2. Systemic risk-taking: amplification effects, externalities, and regulatory responses By Anton Korinek
  3. Domestic financial regulation and external borrowing By Lanau, Sergi
  4. A Pigovian Approach to Liquidity Regulation By Enrico Perotti; Javier Suarez
  5. Risk Spillovers and Hedging: Why Do Firms Invest Too Much in Systemic Risk? By Willems, Bert; Morbee, J.
  6. Rent-Seeking Origins of Central Banks: The Case of the Federal Reserve System By Tomáš Otáhal
  7. After ten years the Russian crisis how IMF intervention might be evaluated? By Sulimierska, Malgorzata
  8. Strategic climate policy with offsets and incomplete abatement : carbon taxes versus cap-and-trade By Strand, Jon
  9. Price Floors in Emissions Trading to Reduce Policy Related Investment Risks: an Australian View By Frank Jotzo; Steve Hatfield-Dodds

  1. By: Gopinath, Shyamala (Asian Development Bank Institute)
    Abstract: This paper provides an overview of the Reserve Bank of India's approach to macroprudential regulation and systemic risk management, and reviews lessons drawn from the Indian experience. It emphasizes the need for harmonization of monetary policy and prudential objectives, which may not be possible if banking supervision is separated from central banks. It also notes that supervisors need to have the necessary independence and flexibility to act in a timely manner on the basis of available information. Macroprudential regulation is an inexact science with limitations and needs to be used in conjunction with other policies to be effective.
    Keywords: macroprudential regulation; systemic risk management; monetary policy; banking supervision; central banks
    JEL: E52 E58 G28
    Date: 2011–06–06
  2. By: Anton Korinek (University of Maryland, College Park, 4118F Tydings Hall, MD 20742, USA.)
    Abstract: This paper analyzes the efficiency of risk-taking decisions in an economy that is prone to systemic risk, captured by financial amplification effects that occur in response to strong adverse shocks. It shows that decentralized agents who have unconstrained access to a complete set of Arrow securities choose to expose themselves to such risk to a socially inefficient extent because of pecuniary externalities that are triggered during financial amplification. The paper develops an externality pricing kernel that quantifies the state-contingent magnitude of such externalities and provides welfare-theoretic foundations for macro-prudential policy measures to correct the distortion. Furthermore, it derives conditions under which agents employ ex-ante risk markets to fully undo any expected government bailout. Finally, it finds that constrained market participants face socially insufficient incentives to raise more capital during episodes of financial amplification. JEL Classification: E44, G13, G18, D62, H23.
    Keywords: financial amplification, systemic risk, systemic externalities, externality pricing kernel, macroprudential regulation, bailout neutrality.
    Date: 2011–06
  3. By: Lanau, Sergi (International Monetary Fund)
    Abstract: This paper studies the relationship between domestic financial regulation and the incentive of non-banks to borrow from banks abroad using BIS banking data in a gravity framework. Conditional on a large set of macroeconomic controls, we find that under tighter domestic financial regulation non-banks borrow more abroad. Non-banks in a country on the upper quartile of a financial deregulation index borrow 21%–28% more than non-banks in a country with minimum regulation. The finding also holds for more disaggregated regulation measures. Interest rate controls and entry barriers to the banking sector are the most relevant types of regulation. The results in this paper indicate that international borrowing and lending is a prominent element to be taken into account in designing financial stability tools.
    Keywords: Bank regulation; cross-border banking
    JEL: G15 G28
    Date: 2011–05–31
  4. By: Enrico Perotti; Javier Suarez
    Abstract: This paper discusses liquidity regulation when short-term funding enables credit growth but generates negative systemic risk externalities. It focuses on the relative merit of price versus quantity rules, showing how they target different incentives for risk creation. When banks differ in credit opportunities, a Pigovian tax on short-term funding is efficient in containing risk and preserving credit quality, while quantity-based funding ratios are distorsionary. Liquidity buffers are either fully ineffective or similar to a Pigovian tax with deadweight costs. Critically, they may be least binding when excess credit incentives are strongest. When banks differ instead mostly in gambling incentives (due to low charter value or overconfidence), excess credit and liquidity risk are best controlled with net funding ratios. Taxes on short-term funding emerge again as efficient when capital or liquidity ratios keep risk shifting incentives under control. In general, an optimal policy should involve both types of tools.
    Keywords: liquidity requirements; liquidity risk; liquidity risk levies; macroprudential regulation; systemic risk
    JEL: G21 G28
    Date: 2011–04
  5. By: Willems, Bert; Morbee, J. (Tilburg University, Center for Economic Research)
    Abstract: In this paper we show that free entry decisions may be socially inefficient, even in a perfectly competitive homogeneous goods market with non-lumpy investments. In our model, inefficient entry decisions are the result of risk-aversion of incumbent producers and consumers, combined with incomplete financial markets which limit risk-sharing between market actors. Investments in productive assets affect the distribution of equilibrium prices and quantities, and create risk spillovers. From a societal perspective, entrants underinvest in technologies that would reduce systemic sector risk, and may overinvest in risk-increasing technologies. The inefficiency is shown to disappear when a complete financial market of tradable risk-sharing instruments is available, although the introduction of any individual tradable instrument may actually decrease efficiency. We therefore believe that sectors without well-developed financial markets will benefit from sector-specific regulation of investment decisions.
    Keywords: investments in productive assets;hedging;systemic risk;risk spillovers
    JEL: L51 L97 H23 G11
    Date: 2011
  6. By: Tomáš Otáhal (Department of Economics, FBE MENDELU in Brno)
    Abstract: What were the purposes for establishment of central banks? Central banks are historically relatively young organizations. Their main purposes are to regulate money supply through interest rates, regulate the banking sector and act as a lender of last resort to banking sector during the time of financial crises. Historical evidence suggests that in the second half of 19th century in the USA private clearing houses were able to provide the banking sector with similar services. In this paper, we follow such evidence and provide Public Choice explanation for establishment of central banks. On the historical example of establishment of the Federal Reserve System we show that the motivation for establishment of the Federal Reserve System might be rather political instead of economic. More precisely, we argue that the Federal Reserve System was established to allow the American Federal Government to control rent- distribution through money supply control and banking sector regulation.
    Keywords: Federal Reserve System, financial markets institutions, historical example, rent-seeking
    JEL: D72 D73 N21 E42 E58
    Date: 2011–04
  7. By: Sulimierska, Malgorzata
    Abstract: The ongoing global financial crisis has become prominently visible since September 2008. This crisis affected the whole world and enhanced the importance of policy implementation to mitigate financial crises in future. Many academics blamed insufficient domestic regulation as the reason of crises, others pointed to the lack of overseas financial regulation and inappropriate actions by international organizations, such as the IMF and World Bank. This whole discussion encouraged to look back and analyzed a previous crisis in smallest countries such as Russia. This paper evidently shows the inefficiency of IMF policy during the Russia Crisis in 1998 by implementing a new monetary balance-of-payment model in Russian data. This model identified the role of macroeconomic fundamentals and international economic policy implications on the likelihood and the timing of the currency crisis in Russia. For the period from December 1995 to December 1998 it was found that, the increase in domestic credit growth gradually undermined confidence in the fixed exchange rate regime. The most dangerous point was at the end of 1998, when the collapse probability was above 90 percent. This result ambiguously questioned the IMF’s July packet 1998 and proved the political aspects of this financial help.
    Keywords: currency crisis; financial liberalization; sudden-stops; monetary balance-of-payment model; Russian crisis; IMF’s policy
    JEL: F40 E58 E40
    Date: 2011–04–29
  8. By: Strand, Jon
    Abstract: This paper provides a first analysis of optimal offset policies by a"policy bloc"of fossil fuel importers implementing a climate policy, facing a (non-policy) fringe of other importers, and a bloc of fuel exporters. The policy bloc uses either a carbon tax or a cap-and-trade scheme, jointly with a fully efficient offset mechanism for reducing emissions in the fringe. The policy bloc is then shown to prefer a tax over a cap-and-trade scheme, since 1) a tax extracts more rent as fuel exporters reduce the export price, and more so when the policy bloc is larger relative to the fringe; and 2) offsets are more favorable to the policy bloc under a tax than under a cap-and-trade scheme. The optimal offset price under a carbon tax is half the tax rate; under a cap-and-trade scheme the quota and offset price are equal. The domestic carbon and offset price are both higher under a tax than under a cap-and-trade scheme when the policy bloc is small; when it is larger the offset price can be higher under a cap-and-trade scheme. Fringe countries gain by mitigation in the policy bloc, and more under a carbon tax since the fuel import price is lower, and since the price obtained when selling offsets is often higher (always so for a large fringe).
    Keywords: Climate Change Economics,Climate Change Mitigation and Green House Gases,Energy Production and Transportation,Markets and Market Access,Environment and Energy Efficiency
    Date: 2011–06–01
  9. By: Frank Jotzo; Steve Hatfield-Dodds (CSIRO Energy Transformed Flagship, Canberra, ACT, Australia; Centre for Climate Economics and Policy, Crawford School of Economics & Government, Australian National University, Canberra, ACT, Australia)
    Abstract: The merits of floor prices in emissions trading schemes (ETS) depend on the problem addressed. Traditional hybrid approaches emphasise automatic response to lower than anticipated abatement costs, but we find adjusting emissions targets over time is the better way to deal with this in the context of climate policy. We find, however, that a price floor is well suited to addressing policy generated carbon price risk as domestic and international policy frameworks mature, reducing the risk of unintended low carbon prices. Reducing such downside risk can encourage cost effective investment in low-emissions assets that might otherwise be precluded by perceived policy risks, even if the price floor is never actually triggered. In AustraliaÕs planned ETS, a price floor could support investments that lower the national emissions trajectory, and boost policy stability and credibility. A price floor in operation can increase the static costs of achieving a given emissions target, but reduce economic costs over time. Assessment of implementation options suggests a domestic reserve price for auctioned permits along with a periodically adjusted fee on the conversion of international permits for use in the domestic ETS. This approach minimises administrative complexity and avoids arbitrary interventions in carbon markets.
    JEL: Q54 Q58
    Date: 2011–05

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