Assessing the Gains from International Macroprudential Policy Cooperation

We study the effects of coordinated and noncoordinated macroprudential policies in a core-periphery model that emphasizes the role of international financial centers. After documenting empirically the existence of cross-country macroprudential spillovers and policy interdependence, we derive a number of results. First, even absent financial frictions, self-oriented policymakers attempt to manipulate asset prices to their advantage, resulting in higher long-run capital taxes. Second, financial frictions generate a subsidization bias, as policymakers aim at eliminating the inefficiency wedge between the cost of capital and the deposit rate. Third, self-oriented national policies imply insufficient subsidies in the long run and wider efficiency gaps in the short run, resulting in substantial gains from cooperation.