Arbeitspapier
Democratic political economy of financial regulation
This paper offers a simple theory of inefficiently lax financial regulation arising as an outcome of a democratic political process. Lax financial regulation encourages some banks to issue risky residential mortgages. In the event of an adverse aggregate housing shock, these banks fail. When banks do not fully internalize the losses from such failure (due to limited liability), they offer mortgages at less than actuarially fair interest rates. This opens the door to home ownership for young, low net-worth individuals. In turn, the additional demand from these new home-buyers drives up house prices. This leads to a non-trivial distribution of gains and losses from lax regulation among households. On the one hand, renters and individuals with large non-housing wealth suffer from the fragility of the banking system. On the other hand, some young, low net-worth households are able to get a mortgage and buy a house, and current (old) home-owners benefit from the increase in the price of their houses. When these latter two groups, who benefit from the lax regulation, constitute a majority of the voting population, then regulatory failure can be an outcome of the democratic political process.
- Sprache
-
Englisch
- Erschienen in
-
Series: Bank of Canada Staff Working Paper ; No. 2021-59
- Klassifikation
-
Wirtschaft
Interest Rates: Determination, Term Structure, and Effects
Financial Markets and the Macroeconomy
Financial Crises
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Financial Institutions and Services: Government Policy and Regulation
Other Economic Systems: Political Economy; Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies
- Thema
-
Financial stability
Financial system regulation and policies
Housing
Interest rates
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Livshits, Igor
Park, Youngmin
- Ereignis
-
Veröffentlichung
- (wer)
-
Bank of Canada
- (wo)
-
Ottawa
- (wann)
-
2021
- DOI
-
doi:10.34989/swp-2021-59
- Handle
- Letzte Aktualisierung
-
10.03.2025, 11:42 MEZ
Datenpartner
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.
Objekttyp
- Arbeitspapier
Beteiligte
- Livshits, Igor
- Park, Youngmin
- Bank of Canada
Entstanden
- 2021
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