The Prudential Regulation Hypothesis

Başçı E.

10 Years after the failure of Lehman Brothers: What have we learned?, 13 - 14 September 2018, pp.67-68

  • Publication Type: Conference Paper
  • Doi Number: 10.1787/d45f979e-en
  • Page Numbers: pp.67-68
  • TED University Affiliated: No


Before the GFC, both monetary and prudential policies eased gradually over three decades. After the GFC, monetary easing continued but was accompanied with a justifiable degree of tightening in prudential policies. Ten years after the GFC, the big question is whether monetary policy can be normalised and what that ‘new normal’ would look like, in particular, if negative interest rates would be a permanent feature of the new normal. I argue that they could, together with stagnant growth in broad money aggregates. Even a modest degree of prudential regulation in the financial system may give rise to these two results. In fact a necessary condition for observing negative interest rates in the equilibrium of an economic model is to incorporate prudential regulations as constraints on borrowing. My main message here is that prudential policy matters a lot and should not be ignored by economists.