Kashyap, K. A., Tsomocos, D. & Vardoulakis, A. (2014) “Making macroprudential regulation operational“, VoxEU Organisation, 18 July.
Do the extant workhorse models used in policy analysis support macroprudential and macrofinancial policies? This column argues that this is not the case and describes a new macroprudential model that stresses the special role played by banks. The model also accounts for two, often neglected, key principles of the financial systems. Some of the findings of the model could carry over to other, more general settings that satisfy these two principles.
The IMF staff (Benes et al. 2014) recently unveiled a new model that “has been developed at the IMF to support macrofinancial and macroprudential policy analysis”. In introducing the model they argue that “such new analytical frameworks require a major revamp of the conventional linear dynamic stochastic general equilibrium (DSGE) models”. We agree with Benes et al. that the workhorse extant models used in policy analysis are not well suited to this task and that “an area that requires particular attention is the special role played by banks, most importantly the role of bank balance sheets.” But, while we share their motivation and goals, we suggest a slightly different modelling approach. The purpose of this note is to present our vision for how such macroprudential modelling efforts might best proceed. We begin with some philosophic observations about the key ingredients that should be included in this kind of analysis and then describe a few findings from a model we have developed.
Relevant posts:
- Dorn, Ν. (2014) “The real lesson from the financial crisis is that we need to stop insulating financial regulation from democracy“, LSE EUROPP, 15 July.
- Spellman, J. (2014) “EU Launches Long-Awaited Overhaul of Megabank Regulation“, The European Institute, EI Blog, January.
- Visco, I. (2013) “The aftermath of the crisis: Regulation, supervision and the role of central banks“, Centre for Economic Policy Research, Policy Insight No.68, December.