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Macroprudential Regulation Versus Mopping Up After the Crash

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  • Olivier Jeanne
  • Anton Korinek

Abstract

This 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18675.

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Date of creation: Jan 2013
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Handle: RePEc:nbr:nberwo:18675

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References

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  1. Javier Bianchi, 2012. "Efficient bailouts?," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 133, Federal Reserve Bank of Dallas.
  2. Enrico Perotti & Javier Suarez, 2011. "A Pigovian Approach to Liquidity Regulation," DNB Working Papers, Netherlands Central Bank, Research Department 291, Netherlands Central Bank, Research Department.
  3. Javier Bianchi, 2011. "Overborrowing and Systemic Externalities in the Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 101(7), pages 3400-3426, December.
  4. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2001. "A corporate Balance-Sheet Approach to Currency Crises," Working Papers, Swiss National Bank, Study Center Gerzensee 01.05, Swiss National Bank, Study Center Gerzensee.
  5. Olivier Jeanne & Anton Korinek, 2010. "Excessive Volatility in Capital Flows: A Pigouvian Taxation Approach," Working Paper Series, Peterson Institute for International Economics WP10-5, Peterson Institute for International Economics.
  6. Olivier Jeanne & Anton Korinek, 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," NBER Working Papers 16377, National Bureau of Economic Research, Inc.
  7. Juan Jung, 2012. "Externalities and Absorptive Capacity in a context of Spatial Dependence: The case of European Regions," Documentos de Trabajo (working papers), Department of Economics - dECON 2212, Department of Economics - dECON.
  8. Guido Lorenzoni, 2007. "Inefficient Credit Booms," NBER Working Papers 13639, National Bureau of Economic Research, Inc.
  9. Bengt Holmstrom & Jean Tirole, 1996. "Private and Public Supply of Liquidity," NBER Working Papers 5817, National Bureau of Economic Research, Inc.
  10. Ryo Kato & Takayuki Tsuruga, 2011. "Bank Overleverage and Macroeconomic Fragility," IMES Discussion Paper Series, Institute for Monetary and Economic Studies, Bank of Japan 11-E-15, Institute for Monetary and Economic Studies, Bank of Japan.
  11. Enrique Mendoza & Javier Bianchi, 2010. "Overborrowing, financial crises and ‘macro-prudential’ taxes," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Oct.
  12. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 14-31, March.
  13. repec:dgr:uvatin:2011040 is not listed on IDEAS
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Cited by:
  1. de la Torre, Augusto & Ize, Alain, 2013. "The rhyme and reason for macroprudential policy : four guideposts to find your bearings," Policy Research Working Paper Series, The World Bank 6576, The World Bank.
  2. Anton Korinek & Jonathan Kreamer, 2013. "The Redistributive Effects of Financial Deregulation," NBER Working Papers 19572, National Bureau of Economic Research, Inc.
  3. Derviz, Alexis, 2013. "Bubbles, bank credit and macroprudential policies," Working Paper Series, European Central Bank 1551, European Central Bank.
  4. John Moore (The University of Edinburgh), 2013. "Pecuniary Externality through Credit Constraints: Two Examples without Uncertainty," ESE Discussion Papers, Edinburgh School of Economics, University of Edinburgh 233, Edinburgh School of Economics, University of Edinburgh.
  5. Oliver D. Hart & Luigi Zingales, 2013. "Liquidity and Inefficient Investment," NBER Working Papers 19184, National Bureau of Economic Research, Inc.

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