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http://ssrn.com/abstract=2034870
 
 

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Financial Regulation in General Equilibrium


Charles Goodhart


London School of Economics & Political Science (LSE) - Financial Markets Group

Anil K. Kashyap


University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago

Dimitrios P. Tsomocos


University of Oxford - Said Business School and St. Edmund Hall

Alexandros Vardoulakis


Board of Governors of the Federal Reserve System (FRB)

March 1, 2012

Banque de France Working Paper No. 372

Abstract:     
This paper explores how different types of financial regulation could combat many of the phenomena that were observed in the financial crisis of 2007 to 2009. The primary contribution is the introduction of a model that includes both a banking system and a “shadow banking system” that each help households finance their expenditures. Households sometimes choose to default on their loans, and when they do this triggers forced selling by the shadow banks. Because the forced selling comes when net worth of potential buyers is low, the ensuing price dynamics can be described as a fire sale. The proposed framework can assess five different policy options that officials have advocated for combating defaults, credit crunches and fire sales, namely: limits on loan to value ratios, capital requirements for banks, liquidity coverage ratios for banks, dynamic loan loss provisioning for banks, and margin requirements on repurchase agreements used by shadow banks. The paper aims to develop some general intuition about the interactions between the tools and to determine whether they act as complements and substitutes.

Number of Pages in PDF File: 53

Keywords: Price setting, changeover, euro, inflation

JEL Classification: E31, F33, M39

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Date posted: April 5, 2012  

Suggested Citation

Goodhart, Charles and Kashyap, Anil K. and Tsomocos, Dimitrios P. and Vardoulakis, Alexandros, Financial Regulation in General Equilibrium (March 1, 2012). Banque de France Working Paper No. 372. Available at SSRN: http://ssrn.com/abstract=2034870 or http://dx.doi.org/10.2139/ssrn.2034870

Contact Information

Charles A.E. Goodhart
London School of Economics & Political Science (LSE) - Financial Markets Group ( email )
Houghton Street
London WC2A 2AE
United Kingdom
0207 955 7555 (Phone)
0207 242 1006 (Fax)
Anil K. Kashyap
University of Chicago, Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7260 (Phone)
773 702-0458 (Fax)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-7260 (Phone)
773-702-0458 (Fax)
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
Chicago, IL 60604
United States
Dimitrios P. Tsomocos
University of Oxford - Said Business School and St. Edmund Hall ( email )
Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 932 (Phone)
+44 1865 288 805 (Fax)
Alexandros Vardoulakis (Contact Author)
Board of Governors of the Federal Reserve System (FRB) ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
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