Macroprudential Regulation Versus Mopping Up After the Crash
AbstractThis paper compares ex-ante policy measures (such as macroprudential regulation) and ex-post policy interventions (such as bailouts) to respond to financial crises in models of financial amplification, i.e. models in which falling asset prices, declining net worth and tightening financial constraints reinforce each other. The optimal policy mix in such models involves a combination of both types of measures since they offer alternative ways of mitigating binding financial constraints. Comparing their relative merits, ex-post policy interventions are only taken once a crisis has materialized and are therefore better targeted, whereas ex-ante measures are blunter since they depend on crisis expectations. However, ex-post interventions distort incentives and create moral hazard. This introduces a time consistency problem, which can in turn be solved by ex-ante policy measures. Limiting ex-post transfers to the revenue accumulated in a bailout fund reduces welfare.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18675.
Date of creation: Jan 2013
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Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-12 (All new papers)
- NEP-CBA-2013-01-12 (Central Banking)
- NEP-MAC-2013-01-12 (Macroeconomics)
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- Derviz, Alexis, 2013. "Bubbles, bank credit and macroprudential policies," Working Paper Series 1551, European Central Bank.
- John Moore (The University of Edinburgh), 2013. "Pecuniary Externality through Credit Constraints: Two Examples without Uncertainty," ESE Discussion Papers 233, Edinburgh School of Economics, University of Edinburgh.
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