A baseline stock-flow model for the analysis of macroprudential regulation for Latin America and the Caribbean

By Esteban Ramon Perez Caldentey, Lorenzo Nalin, Leonardo Rojas

PKES Working Paper 2217

May 2022

This paper provides a critical view of macroprudential regulation/policies found in mainstream and post-Keynesian economics. The paper provides a macroeconomic framework that can be used as a basis for the analysis of macroprudential guidelines and policies. It is based on on five main principles/guidelines: (i) financial fragility is endogenous and results from the normal functioning of market based economies driven by the profit motive; (ii) financial fragility can originate in the financial and real sectors of an economy; (iii) financial cycles are not necessarily driven by boom and busts and financial fragility need not originate in an economic boom; (iv) macroprudential policies should be viewed from a dynamic perspective, that is they must take into account the changes in the international financial architecture/structure and be region/country specific; and (v) macroprudential regulation/guidelines requires a truly macroeconomic framework. These principles are captured in the specification of a baseline stock-flow model for Latin America and the Caribbean with five sectors (government, central bank, financial sector, private sector, and external sector). The model is a tool that can be used for evaluating other macroprudential policies.

Keywords: Debt, external constraint, external financial cycle, financial flows, Latin America and the Caribbean, microprudential and macroprudential regulation, stock-flow

JEL classification: B59 E32 E52 F21 F41 G15