Macroprudential Policy Coordination with International Capital Flows

45 Pages Posted: 16 May 2017

See all articles by William Chen

William Chen

Massachusetts Institute of Technology (MIT)

Gregory Phelan

Williams College

Date Written: May 13, 2017

Abstract

We theoretically illustrate how macroprudential policy spillovers through international capital flows can lead to uncoordinated policy choices that are tighter than would occur with coordination. We consider a symmetric two-country macro model in which countries have limited ability to issue state-contingent contracts in international markets. Accordingly, output endogenously depends on the relative share of wealth held by each country. Because markets are incomplete, welfare can be improved by regulating countries' borrowing positions. Tighter macroprudential policy in country A (limiting leverage or capital inflows) stabilizes country A and endogenously increases the frequency with which A is relatively more wealthy than country B. Thus, tight policy in A provides incentives for B to choose tight policy as well so that B is not poor on average relative to A. We numerically solve for the coordinated and uncoordinated equilibria when countries choose among countercyclical macroprudential policies.

Keywords: International Capital Flows, Capital Controls, Macroeconomic Instability, Macroprudential Regulation, Policy Coordination, Spillovers, Financial Crises

JEL Classification: E44, F36, F38, F42, G15

Suggested Citation

Chen, William and Phelan, Gregory, Macroprudential Policy Coordination with International Capital Flows (May 13, 2017). Available at SSRN: https://ssrn.com/abstract=2968963 or http://dx.doi.org/10.2139/ssrn.2968963

William Chen

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Gregory Phelan (Contact Author)

Williams College ( email )

Williamstown, MA 01267
United States

HOME PAGE: http://sites.google.com/site/gregoryphelan/research

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