Macroprudential policy in the lab

  • Higher capital ratios are believed to improve system-wide financial stability through three main channels: (i) higher loss-absorption capacity, (ii) lower moral hazard, (iii) stabilization of the financial cycle if capital ratios are increased during good times. We examine these mechanisms in a laboratory asset market experiment with indebted participants. We find support for the loss-absorption channel: higher capital ratios reduce the bankruptcy rate. However, we do not find support for the moral hazard channel. Higher capital ratios (insignificantly) increase asset price bubbles, an aggregate measure of excessive risk-taking. Additional evidence suggests that bankruptcy aversion explains this surprising result. Finally, the evidence supports the idea that higher capital ratios in good times stabilize the financial cycle.

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Author:Paul J. Gortner, Baptiste Massenot
Parent Title (English):SAFE working paper series ; No. 239
Series (Serial Number):SAFE working paper series (239)
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2018
Year of first Publication:2018
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2019/01/08
Issue:December 20, 2018
Page Number:26
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht