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Overborrowing, Financial Crises and ‘Macro-Prudential’ Policy?

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  • Enrique G. Mendoza
  • Javier Bianchi

Abstract

This paper studies overborrowing, financial crises and macro-prudential policy in an equilibrium model of business cycles and asset prices with collateral constraints. Agents in a decentralized competitive equilibrium do not internalize the negative effects of asset fire-sales on the value of other agents'' assets and hence they borrow too much" ex ante, compared with a constrained social planner who internalizes these effects. Average debt and leverage ratios are slightly larger in the competitive equilibrium, but the incidence and magnitude of financial crises are much larger. Excess asset returns, Sharpe ratios and the market price of risk are also much larger. State-contigent taxes on debt and dividends of about 1 and -0.5 percent on average respectively support the planner’s allocations as a competitive equilibrium and increase social welfare.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/24.

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Length: 53
Date of creation: 01 Feb 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/24

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Related research

Keywords: Borrowing; Credit; Economic models; Global Financial Crisis 2008-2009; financial crises; probability; financial crisis; correlation; covariance; calibration; standard deviation; sensitivity analysis; equations; credit booms; statistics; optimization; autocorrelation; markov chain; correlations; probabilities; equation; recessions; general equilibrium model; stochastic process; credit boom; global financial crisis; banking crises; horizontal axis; standard deviations; stochastic processes; prudential ? regulation; crisis episode; survey; systemic risk; constant term; contagion; computation; recession; functional forms; crisis probability; future financial crisis; markov process;

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References

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  1. Urban Jermann & Vincenzo Quadrini, 2009. "Macroeconomic Effects of Financial Shocks," NBER Working Papers 15338, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Adrian, Tobias & Boyarchenko, Nina, 2014. "Liquidity policies and systemic risk," Staff Reports, Federal Reserve Bank of New York 661, Federal Reserve Bank of New York.
  2. Tommaso Trani, 2012. "Countercyclical Capital Regulation and Bank Ownership Structure," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 14-2012, Economics Section, The Graduate Institute of International Studies.
  3. Angelini, Paolo & Neri, Stefano & Panetta, Fabio, 2012. "Monetary and macroprudential policies," Working Paper Series, European Central Bank 1449, European Central Bank.
  4. Pau Rabanal & Dominic Quint, 2013. "Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area," 2013 Meeting Papers, Society for Economic Dynamics 604, Society for Economic Dynamics.
  5. Paolo Angelini & Laurent Clerc & Vasco Cúrdia & Leonardo Gambacorta & Andrea Gerali & Alberto Locarno & Roberto Motto & Werner Roeger & Skander Van den Heuvel & Jan Vlcek, 2011. "BASEL III: Long-term impact on economic performance and fluctuations," BIS Working Papers 338, Bank for International Settlements.
  6. Tobias Adrian & Daniel Covitz & Nellie Liang, 2013. "Financial stability monitoring," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2013-21, Board of Governors of the Federal Reserve System (U.S.).
  7. Anton Korinek, 2011. "The New Economics of Capital Controls Imposed for Prudential Reasons+L4888," IMF Working Papers 11/298, International Monetary Fund.
  8. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary leverage cycles and financial stability," Staff Reports, Federal Reserve Bank of New York 567, Federal Reserve Bank of New York.

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