Objective function of macro-prudential regulations
July 24, 2015
I have been in a conference for the past few days, and have seen a few presentations on macropru type regulations.
The authors had an argument like:
The objective of a policy method (like capital, liquidity requirements, etc.) is the minimisation of bad outcomes.
Now why am I bothered?
There is no discussion of the cost of compliance.
So, policy rule might be "optimal" even if it sharply curtails lending to such sectors as SMEs with quite adverse economic consequences and society is worse off.
I think that such policy analysis should be done in a general equilibrium and optimality should be social welfare, not absence of a particular type of bad outcomes.
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