Politically Robust Financial Regulation

Author/Editor:

Itai Agur

Publication Date:

January 8, 2021

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

The deferred recognition of COVID-induced losses at banks in many countries has reignited the debate on regulatory forbearance. This paper presents a model where the public's own political pressure drives regulatory policy astray, because the public is poorly informed. Using probabilistic game stages, the model parameterizes how time consistent policy is. The interaction between political motivations and time consistency is novel and complex: increased policy credibility can entice the politically-motivated regulator to act in the public's best interest, or instead repel it from doing so. Considering several regulatory instruments, the paper probes the nexus of political pressure, perverse bank incentives and time inconsistent policy.

Series:

Working Paper No. 2021/001

Notes:

Appendix for WP/21/1

Frequency:

regular

English

Publication Date:

January 8, 2021

ISBN/ISSN:

9781513566375/1018-5941

Stock No:

WPIEA2021001

Format:

Paper

Pages:

31

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