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Credit Booms, Financial Crises and Macroprudential Policy

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  • Mark Gertler

    (New York University)

  • Nobuhiro Kiyotaki

    (Princeton University)

  • Andrea Prestipino

    (Federal Reserve Board)

Abstract

We develop a model of banking crises which Is consistent with two important features of the data: First, banking crises are usually preceded by credit booms. Second, credit booms often do not result in a crisis. That is, there are "good" booms as well as "bad" booms in the language of Gorton and Ordonez (2019). We then consider how the optimal macroprudential policy weighs the benefits of preventing a crisis against the costs of stopping a good boom. We show that countercyclical capital buffers are a critical feature of a successful macropudential policy.

Suggested Citation

  • Mark Gertler & Nobuhiro Kiyotaki & Andrea Prestipino, 2020. "Credit Booms, Financial Crises and Macroprudential Policy," Working Papers 2020-62, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2020-62
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    File URL: http://www.princeton.edu/~kiyotaki/papers/GKP_RED_2020_latex.pdf
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    Keywords

    banking crisis; credit booms;

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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