02090cas a2200253 a 4500 AALejournalIMF018495 230101c9999 xx r poo 0 0eng d 5.00 USD 9781484357996 1018-5941 BD-DhAAL BD-DhAAL Basak, Deepal. Does Financial Tranquility Call for Stringent Regulation? / Deepal Basak, Yunhui Zhao. Washington, D.C. : International Monetary Fund, 2018. 1 online resource (41 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students Consistent with the Minsky hypothesis and the 'volatility paradox' (Brunnermeier and Sannikov, 2014), recent empirical evidence suggests that financial crises tend to follow prolonged periods of financial stability and investor optimism. But does financial tranquility always call for more stringent regulation over time? We examine this question using a simple portfolio choice model that features the interaction between learning and externality. We evaluate the potential of a macroprudential policy to restore efficiency, and characterize the necessary and sufficient condition for the countercyclicality of the optimal regulation/macroprudential policy. Our paper implies that policymakers should not only consider the cyclical indicators 'on the surface' (for example, credit growth), but also closely examine the deep structural change of the resilience of the system. The paper also highlights the importance of assigning the macroprudential policy function to independent agencies with technical expertise. Mode of access: Internet Zhao, Yunhui. IMF Working Papers; Working Paper ; No. 2018/123 Full text available on IMF http://elibrary.imf.org/view/journals/001/2018/123/001.2018.issue-123-en.xml IMF e-Library