Macroprudential Theory: Advances and Challenges

26 Pages Posted: 31 Mar 2016

See all articles by Henrique S. Basso

Henrique S. Basso

Birkbeck College, University of London

James S. Costain

Banco de España - Research Department

Date Written: March 30, 2016

Abstract

This note discusses recent theoretical work analyzing the causes of financial instability, its consequences for the macroeconomy, and thus the potential role for macroprudential policy. After discussing how information asymmetries and strategic complementarities can cause balance sheet losses to propagate through the financial system and over time, we discuss the role of the major classes of macroprudential instruments in preventing instability ex ante and containing it ex post. We conclude with a discussion of current challenges for macroeconomic modeling and for the design of regulation and policy.

Keywords: banks, financial stability, financial regulation, macroeconomic policy

JEL Classification: E44, E6, G2, G28

Suggested Citation

Basso, Henrique S. and Costain, James S., Macroprudential Theory: Advances and Challenges (March 30, 2016). Banco de Espana Occasional Paper No. 1604. Available at SSRN: https://ssrn.com/abstract=2756361 or http://dx.doi.org/10.2139/ssrn.2756361

Henrique S. Basso (Contact Author)

Birkbeck College, University of London ( email )

Malet Street
London, WC1E 7HX
United Kingdom

James S. Costain

Banco de España - Research Department ( email )

Alcala 50
28014 Madrid
Spain

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