Macroprudential Policy in the Lab

26 Pages Posted: 7 Jan 2019

See all articles by Paul Gortner

Paul Gortner

Goethe University Frankfurt - Research Center SAFE

Baptiste Massenot

Goethe University Frankfurt - Research Center SAFE

Date Written: December 20, 2018

Abstract

Higher capital ratios are believed to improve system-wide financial stability through three main channels: (i) higher loss-absorption capacity, (ii) lower moral hazard, (iii) stabilization of the financial cycle if capital ratios are increased during good times. We examine these mechanisms in a laboratory asset market experiment with indebted participants. We find support for the loss-absorption channel: higher capital ratios reduce the bankruptcy rate. However, we do not find support for the moral hazard channel. Higher capital ratios (insignificantly) increase asset price bubbles, an aggregate measure of excessive risk-taking. Additional evidence suggests that bankruptcy aversion explains this surprising result. Finally, the evidence supports the idea that higher capital ratios in good times stabilize the financial cycle.

JEL Classification: G28, E58

Suggested Citation

Gortner, Paul and Massenot, Baptiste, Macroprudential Policy in the Lab (December 20, 2018). SAFE Working Paper No. 239. Available at SSRN: https://ssrn.com/abstract=3311378 or http://dx.doi.org/10.2139/ssrn.3311378

Paul Gortner

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Baptiste Massenot (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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