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Macroprudential Regulation Versus Mopping Up After the Crash

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  • Anton Korinek

    (Johns Hopkins University and IMF)

  • Olivier Jeanne

    (John Hopkins University)

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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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 405.

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Date of creation: 2013
Date of revision:
Handle: RePEc:red:sed013:405

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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References

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  1. Javier Bianchi, 2010. "Overborrowing and Systemic Externalities in the Business Cycle," 2010 Meeting Papers 96, Society for Economic Dynamics.
  2. Javier Bianchi & Enrique G. Mendoza, 2010. "Overborrowing, Financial Crises and 'Macro-prudential' Taxes," NBER Working Papers 16091, National Bureau of Economic Research, Inc.
  3. Olivier Jeanne & Anton Korinek, 2010. "Excessive Volatility in Capital Flows: A Pigouvian Taxation Approach," American Economic Review, American Economic Association, vol. 100(2), pages 403-07, May.
  4. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
  5. Perotti, Enrico C & Suarez, Javier, 2011. "A Pigovian Approach to Liquidity Regulation," CEPR Discussion Papers 8271, C.E.P.R. Discussion Papers.
  6. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2001. "A Corporate Balance-Sheet Approach to Currency Crises," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 01.14, Université de Lausanne, Faculté des HEC, DEEP.
  7. Ryo Kato & Takayuki Tsuruga, 2011. "Bank Overleverage and Macroeconomic Fragility," IMES Discussion Paper Series 11-E-15, Institute for Monetary and Economic Studies, Bank of Japan.
  8. Jeanne, O. & Korinek, A., 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," Discussion Paper 2010-108S, Tilburg University, Center for Economic Research.
  9. Javier Bianchi, 2012. "Efficient bailouts?," Globalization and Monetary Policy Institute Working Paper 133, Federal Reserve Bank of Dallas.
  10. repec:dgr:uvatin:2011040 is not listed on IDEAS
  11. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  12. Guido Lorenzoni, 2008. "Inefficient Credit Booms," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 809-833.
  13. Juan Jung, 2012. "Externalities and Absorptive Capacity in a context of Spatial Dependence: The case of European Regions," Documentos de Trabajo (working papers) 2212, Department of Economics - dECON.
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Citations

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Cited by:
  1. Anton Korinek & Jonathan Kreamer, 2013. "The Redistributive Effects of Financial Deregulation," IMF Working Papers 13/247, International Monetary Fund.
  2. 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 6576, The World Bank.
  3. Hart, Oliver & Zingales, Luigi, 2013. "Liquidity and Inefficient Investment," CEPR Discussion Papers 9537, C.E.P.R. Discussion Papers.
  4. 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.
  5. Derviz, Alexis, 2013. "Bubbles, bank credit and macroprudential policies," Working Paper Series 1551, European Central Bank.

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