Macroprudential Policy with Leakages

47 Pages Posted: 7 Oct 2019

See all articles by Julien Bengui

Julien Bengui

Université de Montréal

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Multiple version iconThere are 2 versions of this paper

Date Written: August 2019


The outreach of macroprudential policies is likely limited in practice by imperfect regulation enforcement, whether due to shadow banking, regulatory arbitrage, or other regulation circumvention schemes. We study how such concerns affect the design of optimal regulatory policy in a workhorse model in which pecuniary externalities call for macroprudential taxes on debt, but with the addition of a novel constraint that financial regulators lack the ability to enforce taxes on a subset of agents. While regulated agents reduce risk taking in response to debt taxes, unregulated agents react to the safer environment by taking on more risk. These leakages do undermine the effectiveness of macruprudential taxes, yet they do not necessarily call for weaker interventions. Quantitatively, we find that a well-designed macroprudential policy that accounts for leakages remains successful at mitigating the vulnerability to financial crises.

Keywords: capital flow management, financial crises, limited regulation enforcement, macroprudential policy, regulatory arbitrage

JEL Classification: E58, F32, G28

Suggested Citation

Bengui, Julien and Bianchi, Javier, Macroprudential Policy with Leakages (August 2019). CEPR Discussion Paper No. DP13951, Available at SSRN:

Julien Bengui (Contact Author)

Université de Montréal ( email )

C.P. 6128 succursale Centre-ville
Montreal, Quebec H3C 3J7

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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