Template-Type: ReDIF-Paper 1.0
Author-Name: Enisse Kharroubi
Author-X-Name-First: Enisse
Author-X-Name-Last: Kharroubi
Title: Global lending conditions and international coordination of financial regulation policies
Abstract: Using a model of strategic interactions between two countries, I investigate the gains to international coordination of financial regulation policies, and how these gains depend on global lending conditions. When global lending conditions are determined non-cooperatively, I show that coordinating regulatory policies leads to a Pareto improvement relative to the case of no cooperation. In the non-cooperative equilibrium, one region - the core - determines global lending conditions, leaving the other region - the periphery - in a sub-optimal situation. The periphery then tightens regulatory policy to reduce the cost of sub-optimal lending conditions. Yet, in doing so, it fails to internalise a cross-border externality: tightening regulatory policy in one region limits ex ante borrowing in the other region, which increases the cost of sub-optimal lending conditions for the periphery. The equilibrium with cooperative regulatory policies can then improve on this outcome as both regions take into account the cross-border externality and allow for larger ex ante borrowing, ending in a lower cost of suboptimal lending conditions for the periphery.
Length: 39 pages
Creation-Date: 2021-08
File-URL: https://www.bis.org/publ/work962.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work962.htm
File-Format: text/html
Number: 962
Keywords: regulatory policy, global financial conditions, international coordination
Classification-JEL: D53, D62, F38, F42, G18
Handle: RePEc:bis:biswps:962