Overborrowing, Financial Crises and ‘Macro-prudential’ Policy

February 1, 2011

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Format: Chicago

Enrique G. Mendoza, and Javier Bianchi. Overborrowing, Financial Crises and ‘Macro-prudential’ Policy, (USA: International Monetary Fund, 2011) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper studies overborrowing, financial 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 effects of asset fire-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 effects. Average debt and leverage ratios are slightly larger in the competitive equilibrium, but the incidence and magnitude of financial crises are much larger. Excess asset returns, Sharpe ratios and the market price of risk are also much larger. State-contigent 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.

Subject: Asset prices, Collateral, Consumption, Credit, Financial crises

Keywords: Fixed price, Interest rate, Mover accent, Working capital, WP

Publication Details

Pages:

53
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/024
Stock No:

WPIEA2011024
ISBN:

9781455216710
ISSN:

1018-5941

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