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

By Javier Bianchi, Enrique G. Mendoza. Social Science Research Network, 2011

171 citations recorded by the source corpus.

This paper studies overborrowing, flnancial 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 efiects of asset flre-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 efiects. Average debt and leverage ratios are slightly larger in the competitive equilibrium, but the incidence and magnitude of flnancial crises are much larger. Excess asset returns, Sharpe ratios and the market price of risk are also much larger. State-contingent 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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Citations in the corpus

Dilemma Not Trilemma? Capital Controls and Exchange Rates with Volatile Capital Flows (2014, background): “A large literature in international macroeconomics is motivated by the volatility of capital flows, especially “sudden stops”, see Mendoza (2010) and the references therein. Models with financial frictions such as Caballero and Krishnamurthy (2004) emphasize domestic and international collateral con”
Dealing with the Trilemma: Optimal Capital Controls with Fixed Exchange Rates (2012, unknown): “A large literature in international macroeconomics is motivated by the volatility of capital flows, especially “sudden stops”, see Mendoza (2010) and the references therein. Models with financial frictions such as Caballero and Krishnamurthy (2004) emphasize domestic and international collateral con”
The New Economics of Prudential Capital Controls: A Research Agenda (2011, background): “Jeanne and Korinek (2010b) and Bianchi and Mendoza (2011) show that optimal prudential regulation is highly cyclical.”
Optimal Time-Consistent Macroprudential Policy (2017, background): “In this case, the marginal benefit of holding more assets as collateral shows up as the term 2mtkt in R ep t (see Mendoza and Smith 2006; Bianchi and Mendoza 2010).”
A Theory of Macroprudential Policies in the Presence of Nominal Rigidities (2013, background): “(2009); Bianchi and Mendoza (2010); Jeanne and Korinek (2010); Bianchi (2011); Korinek (2011); Davilla (2011); Stein (2012); Korinek (2012a,b); Jeanne and Korinek (2013). Woodford (2011) studies a model with nominal rigidities and pecuniary externalities, and characterizes optimal monetary policy an”
Monetary Policy, Financial Conditions, and Financial Stability (2014, background): “Bianchi and Mendoza (2011) find some welfare benefits of an LTV in a model that incorporates that borrowers will borrow more than socially optimal because they do not consider a debt deflation spiral arising from binding collateral constraints based on falling asset values. But they also find that a”
Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area (2013, background): “Bianchi and Mendoza (2011) study the role of macroprudential taxes to avoid the externalities associated to overborrowing .”
Intermediary Leverage Cycles and Financial Stability (2012, unknown): “Our paper is among the few that consider the role of (macro)prudential policies in dynamic equilibrium models explicitly (see Goodhart et al. (2012), Angelini et al. (2011), and Bianchi and Mendoza (2011) for alternative settings).”
Capital Flows and Financial Stability: Monetary Policy and Macroprudential Responses (2011, background): “YX,t = α ∗( PX,t P ∗ t )−γ ∗ Y ∗ t , (7)”
Leaning Against Boom-Bust Cycles in Credit and Housing Prices (2013, unknown): “Rt = R rR t−1π (1−rR)rπ t ( GDPt GDPt−1 )(1−rR)rY rr(1−rR) uR,t As,t , (6)”
Pecuniary Externalities in Economies with Financial Frictions (2016, unknown): “Lorenzoni (2008) considers fire sales in an economy in which borrowers are financially constrained and limited commitment by lenders constrains insurance provision, similar to Application 3. This generates distributive externalities that give rise to overinvestment and excessive borrowing against th”
Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity (2011, unknown): “This may be useful in light of findings by Reinhart and Rogoff ð2009Þ and Bianchi and Mendoza ð2012Þ that large financial shocks are rare in postwar US history.”
Optimal Monetary and Prudential Policies (2017, unknown): “A producer i using technology R chooses xt (i) to maximize (1− φt)βEt { λt+1 λt [ qt+1 exp ( η t ) xt (i)− 1 +R t Πt+1 l t (i) ]∣∣∣∣ θt = 1} subject to (7) and (9), where Et { .”