In the mood swings paradigm like all market

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Unformatted text preview: etary Policy Rates in % EAP‐7 Regional aggregates are calculated as simple averages for 2005. LAC figures usually calculated using data of LAC‐7 countries. Source: WDI. Regional aggregates are calculated as simple averages for 2005. LAC figures usually calculated using data of LAC‐7 countries. Source: WDI. Figure 18 Monetary Policy Rates in % Index of constraints to implement counter‐cyclical fiscal police 1.0 9 18 ECA Debt burden 8 16 Primary deficits Commodity dependence Expenditure rigidity MEXICO BRAZIL Financing constraints Financing costs 0.8 7 CHILE 14 6 PERU 12 0.6 5 4 10 0.4 3 8 US COLOMBIA 2 0.2 6 1 0.0 Jan‐09 Apr‐09 Jul‐08 Oct‐08 Jan‐08 Apr‐08 Jul‐07 Oct‐07 Apr‐07 Jul‐06 Jan‐07 Oct‐06 Jan‐06 Jan‐09 Apr‐09 Jul‐08 Oct‐08 Jan‐08 Apr‐08 Jul‐07 Oct‐07 Apr‐07 Jul‐06 Jan‐07 Oct‐06 Jan‐06 Apr‐06 Apr‐06 0 4 Chile Brazil Colombia Peru Mexico Argentina Ecuador Venezuela This index is the weighted average of the relative score of the six different categories. The index as well as each category take values between 0 and 1. Higher values indicate higher constraints on the scope for counter‐cyclical fiscal police. Source: LCRCE Office calculations based on National Authorities data. Source: Bloomberg – National Authorities 21 22 2. REGULATORY REFORM: INTEGRATING PARADIGMS Augusto de la Torre and Alain Ize April 2009* Abstract The Subprime crisis resulted from the interplay of information asymmetry and control problems with failures to internalize systemic risk and recognize the implications of Knightian uncertainty. A successful reform of prudential regulation will thus need to integrate more harmoniously the three paradigms of agency, externalities, and mood swings. This is a tall order because each paradigm has different and often inconsistent regulatory implications. Moreover, efforts to address problems under one paradigm can exacerbate problems under the others. To avoid regulatory arbitrage and ensure that externalities are uniformly internalized, all prudentially regulated intermediaries should be subjected to the same capital adequacy requirements, and unregulated intermediaries should be financed only by regulated intermediaries. Reflecting the importance of uncertainty and mood swings, the new regulatory architecture will also need to rely less on market discipline and more on “holistic” supervision, and incorporate countercyclical norms that can be adjusted in light of changing circumstances. Introduction As in the case of the other two large financial crises in modern U.S. history, the Great Depression and the Savings & Loan (S&L) crisis, the Subprime crisis was triggered by the inability of financial intermediaries to withstand large macroeconomic price volatility.17 In the Great Depression, banks started failing when the stock market crash induced losses on their equity investments or the loans they had given to investors towards the purchase of stocks. In the S&L crisis, the mai...
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This document was uploaded on 11/14/2013.

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