Working Paper: NBER ID: w27953
Authors: Benjamin M. Hbert
Abstract: How can we assess whether macro-prudential regulations are having their intended effects? If these regulations are optimal, their marginal benefit of addressing externalities should equal their marginal cost of distorting risk-sharing. These risk-sharing distortions will manifest as trading opportunities that intermediaries are unable to exploit. Focusing in particular on arbitrage opportunities, I construct an “externality-mimicking portfolio” whose returns track the externalities that would rationalize existing regulations as optimal. I conduct a revealed-preference exercise using this portfolio and test whether the recovered externalities are sensible. I find that the signs of existing CIP violations are inconsistent with optimal policy.
Keywords: No keywords provided
JEL Codes: E61; F31; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| existing macroprudential regulations (E60) | intended effects (E60) |
| patterns of arbitrage observed in financial markets (G15) | existing macroprudential regulations (E60) |
| returns of the externality-mimicking portfolio (D62) | risk transfer to households (G52) |
| CIP violations (K42) | optimal policy (C61) |
| existing macroprudential regulations (E60) | risk-sharing dynamics in the market (D16) |