The Macroeconomics of the Credit Crisis: In Search of Externalities for Macro-Prudential Supervision
AbstractIn the analysis of the credit crisis of 2007-2010 a clear distinction should be made between (i) the initial shock; (ii) the propagation and amplification of the initial shock to the systemic crisis of the financial markets; and (iii) the transmission of the credit crisis to the real economic sector causing a major cyclical downturn now known as the great recession. This paper argues that banking supervision failed to anticipate and repair the market failure that caused the huge amplification of the relatively small initial shock. As the repair of market failure is the only sound economic argument for regulation, banking supervisors should now focus on the externalities that caused the amplification of the shock and use that knowledge for adequate macro-prudential supervision in the future. Macro-economic models can be helpful in this search for externalities. The character and timing of future shocks are unpredictable, but contagion in the propagation mechanisms should be mitigated as much as possible.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 10-052/3.
Date of creation: 17 May 2010
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credit crisis; externalities; macro-prudential supervision; contagion; fallacy of composition;
Find related papers by JEL classification:
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-26 (All new papers)
- NEP-BAN-2011-02-26 (Banking)
- NEP-CBA-2011-02-26 (Central Banking)
- NEP-MAC-2011-02-26 (Macroeconomics)
- NEP-PKE-2011-02-26 (Post Keynesian Economics)
- NEP-REG-2011-02-26 (Regulation)
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- Ingo Fender & Janet Mitchell, 2009. "The future of securitisation: how to align incentives," BIS Quarterly Review, Bank for International Settlements, September.
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