The Macroprudential Toolkit

Chicago Booth Initiative on Global Markets Working Paper No. 60

Chicago Booth Research Paper No. 11-02

Fama-Miller Working Paper

21 Pages Posted: 9 Jan 2011 Last revised: 4 Apr 2013

Anil K. Kashyap

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

Richard B. Berner

Morgan Stanley Dean Witter & Co. Inc.

Charles Goodhart

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 5, 2011

Abstract

Most treatments of financial regulation worry about threats to the banking system and the economy from defaults or credit crunches. This paper argues that the recent crisis points to fire sales through capital markets as another source of financial and economic instability. Accounting for fire sales implies several changes to the standard approach. First, if there are three channels of instability, then three regulatory tools are needed to deliver stability. Second, if only a single capital tool and a single liquidity tool are available, then there is a risk that using them pushes activity into the shadow banking system. Third, liquidity requirements on the asset side of bank balance sheets are conceptually different from liquidity requirements on the liability side.

The paper starts with a review of the recent theoretical work on fire sales that form the building blocks for a next generation of models of the financial system. A summary of some evidence suggesting that fire sales were present in the crisis is offered. Next a general equilibrium framework is introduced to describe a financial system in which default, credit crunches and fire sales are all possible. The paper concludes with a discussion of the regulatory options and some speculation on how this framework could be extended.

Suggested Citation

Kashyap, Anil K. and Berner, Richard B. and Goodhart, Charles, The Macroprudential Toolkit (January 5, 2011). Chicago Booth Initiative on Global Markets Working Paper No. 60; Chicago Booth Research Paper No. 11-02; Fama-Miller Working Paper . Available at SSRN: https://ssrn.com/abstract=1735445 or http://dx.doi.org/10.2139/ssrn.1735445

Anil K. Kashyap (Contact Author)

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

Richard B. Berner

Morgan Stanley Dean Witter & Co. Inc. ( email )

1585 Broadway
New York, NY 10036
United States

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)

Paper statistics

Downloads
835
Rank
21,957
Abstract Views
4,267