As part of the Brown Bag Lunch series, the International Economics Department at the Graduate Institute is pleased to invite you to a public talk given by Nika Khinashvili, PhD candidate in International Economics, who will present his paper and work.

Macro-Financial Policy under Regulatory Arbitrage

by Nika Khinashvili

Abstract: 

Following the lessons of the Global Financial Crisis of 2007-2009, the central banks and financial regulators strengthened the resilience of the financial systems by reinforcing their toolboxes with the macroprudential instruments. However, the introduced macroprudential tools are directed only to the regulated banks and do not address risks in the non-regulated financial intermediaries. In fact, recent and growing evidence shows that financial stability vulnerabilities are re-directed to the non-bank financial intermediaries (NBFIs). By analyzing the quantitative DSGE model, the paper studies whether monetary policy should consider financial frictions when a significant part of the agents in the economy is outside of the macroprudential regulatory perimeter and generates financial stability risks. The study shows that optimal monetary policy entails deviation from the traditional real economy’s objective and responds to financial vulnerabilities. But, monetary policy faces trade-offs, resembling the good and evil sides of the ability of monetary policy to “get in all the cracks” of the economy. The paper also finds that monetary and macroprudential policies are complementary and should be coordinated.