Macroprudential Regulations, Income Inequality and the Redistribution Channel

Grant description:

The 2008 global financial crisis outlined the need for a policy toolkit that lessens the pain of financial cycles for the real economy. In particular, conventional macroeconomic policies undertaken by public authorities in the aftermath of the crisis lead to extremely low interest rates and put public finances under heavy strain. During this period, macroprudential regulation established itself as a new cornerstone of regulators’ toolkits. Yet most models evaluating the potential benefits from macroprudential regulation consider redistribution as a side effect by using representative agent models. This project asks whether the redistribution channel calls for stronger or weaker macroprudential regulations, how the effectiveness of prudential capital controls as a financial stability tool are affected by the distribution of income, and what the distributional implications are of prudential regulations. The authors will build on existing research that presents models showing that monetary policy may impact income inequality in ways that then turn out to affect the transmission mechanism for such policy. First, they will be extending models that focus on the closed economy context to the open economy context. Second, they will be providing both a theoretical and a quantitative analysis of the transmission channels associated with capital controls. Third, they will perform their analysis in a dynamic context.