Banking Panics as Endogenous Disasters and the Welfare Gains from Macroprudential Policy

2020 ◽  
Vol 110 ◽  
pp. 463-469
Author(s):  
Mark Gertler ◽  
Nobuhiro Kiyotaki ◽  
Andrea Prestipino
Keyword(s):  
Financial Crises ◽  
Welfare Effects ◽  
Macroeconomic Model ◽  
Statistical Relationship ◽  
Macroprudential Policy ◽  
Welfare Gains ◽  
Credit Booms ◽  
Ex Post ◽  
Banking Panics ◽  
Credit Boom

We study the welfare effects of macroprudential policy in a macroeconomic model of banking instability. Banking panics are endogenous economic disasters caused by banks' excessive leverage during credit booms. The model matches the frequency and severity of banking panics and the statistical relationship between panics and credit booms. A simple countercyclical macroprudential rule can achieve non-negligible welfare gains. These gains rise substantially when the run probability increases during a credit boom and, ex post, if a run is actually avoided. In a model without panics in which financial crises are driven by fundamentals only, the gains are much more limited.

scholarly journals Macroprudential Regulation versus mopping up after the crash

2020 ◽  
Vol 87 (3) ◽  
pp. 1470-1497 ◽  
Author(s):  
Olivier Jeanne ◽  
Anton Korinek
Keyword(s):  
Financial Crises ◽  
Shadow Banking ◽  
Macroprudential Policy ◽  
Second Best ◽  
Macroprudential Regulation ◽  
Liquidity Provision ◽  
Incentive Effects ◽  
Ex Post ◽  
Ex Ante ◽  
Banking Risk

Abstract How should macroprudential policy be designed when policymakers also have access to liquidity provision tools to manage crises? We show in a tractable model of systemic banking risk that there are three factors at play: first, ex post liquidity provision mitigates financial crises, and this reduces the need for macroprudential policy. In the extreme, if liquidity provision is untargeted and costless or if it completely forestalls crises by credible out-of-equilibrium lending-of-last-resort, there is no role left for macroprudential regulation. Second, however, macroprudential policy needs to consider the ex ante incentive effects of targeted liquidity provision. Third, if shadow banking reduces the effectiveness of macroprudential instruments, it is optimal to commit to less generous liquidity provision as a second-best substitute for macroprudential policy.

scholarly journals A Macroeconomic Model with Financial Panics

2019 ◽  
Vol 87 (1) ◽  
pp. 240-288 ◽  
Author(s):  
Mark Gertler ◽  
Nobuhiro Kiyotaki ◽  
Andrea Prestipino
Keyword(s):  
Financial Crisis ◽  
Macroeconomic Model ◽  
Real Activity ◽  
Banking Panics ◽  
Discrete Nature ◽  
Banks And Banking ◽  
Credit Boom

Abstract This article incorporates banks and banking panics within a conventional macroeconomic framework to analyse the dynamics of a financial crisis of the kind recently experienced. We are particularly interested in characterizing the sudden and discrete nature of banking panics as well as the circumstances that make an economy vulnerable to such panics in some instances but not in others. Having a conventional macroeconomic model allows us to study the channels by which the crisis affects real activity both qualitatively and quantitatively. In addition to modelling the financial collapse, we also introduce a belief driven credit boom that increases the susceptibility of the economy to a disruptive banking panic.

Credit Booms, Financial Crises and Macroprudential Policy

2020 ◽  
Author(s):  
Mark Gertler ◽  
Nobuhiro Kiyotaki ◽  
Andrea Prestipino
Keyword(s):  
Financial Crises ◽  
Macroprudential Policy ◽  
Credit Booms

scholarly journals Credit Booms, Financial Crises and Macroprudential Policy

2020 ◽  
Author(s):  
Mark Gertler ◽  
Nobuhiro Kiyotaki ◽  
Andrea Prestipino
Keyword(s):  
Financial Crises ◽  
Macroprudential Policy ◽  
Credit Booms

scholarly journals Credit booms, financial crises, and macroprudential policy

2020 ◽  
Vol 37 ◽  
pp. S8-S33 ◽  
Author(s):  
Mark Gertler ◽  
Nobuhiro Kiyotaki ◽  
Andrea Prestipino
Keyword(s):  
Financial Crises ◽  
Macroprudential Policy ◽  
Credit Booms

An Historical Perspective on the Quest for Financial Stability and the Monetary Policy Regime

2018 ◽  
Vol 78 (2) ◽  
pp. 319-357 ◽  
Author(s):  
Michael D. Bordo
Keyword(s):  
Monetary Policy ◽  
Financial Crises ◽  
Financial Stability ◽  
Historical Perspective ◽  
Asset Price ◽  
Financial Instability ◽  
Historical Evidence ◽  
Policy Regime ◽  
Extreme Form ◽  
Credit Booms

This article surveys the co-evolution of monetary policy and financial stability for a number of countries from 1880 to the present. Historical evidence on the incidence, costs, and determinants of financial crises (the most extreme form of financial instability), combined with narratives on some famous financial crises, suggests that financial crises have many causes, including credit-driven asset price booms, which have become more prevalent in recent decades, but in general financial crises are very heterogeneous and hard to categorize. Moreover, evidence shows that the association across the country sample between credit booms, asset price booms, and serious financial crises is quite weak.

Financial Crises

2018 ◽  
Vol 10 (1) ◽  
pp. 43-58 ◽  
Author(s):  
Gary Gorton
Keyword(s):  
Market Economy ◽  
Financial Crises ◽  
Financial System ◽  
Short Term ◽  
Credit Booms ◽  
Inherent Feature ◽  
Information Event

Financial crises are runs on short-term debt. Whatever its form, short-term debt is an inherent feature of a market economy. A run is an information event in which holders of short-term debt no longer want to lend to banks because they receive information leading them to suspect the value of the backing for the debt, so they run. When runs are system-wide they threaten the solvency of the entire financial system, which then requires either public or private intervention to remedy. Runs, which most likely follow credit booms, are integral parts of movements in the macroeconomy.

scholarly journals Welfare Effects of Anti-Sprawl Policies in the Presence of Urban Decline

2011 ◽  
Vol 40 (3) ◽  
pp. 439-450 ◽  
Author(s):  
Antonio M. Bento ◽  
Sofia F. Franco ◽  
Daniel Kaffine
Keyword(s):  
Urban System ◽  
Welfare Effects ◽  
Urban Decline ◽  
Welfare Gains ◽  
Optimal Development ◽  
Suburban Sprawl ◽  
Lump Sum ◽  
City Core ◽  
The City

This paper extends first-best analysis of anti-sprawl policies, such as development taxes, and examines the welfare effects of development taxes in the presence of urban decline at the city core. We find that anti-sprawl policies generate several important feedbacks within the urban system, generating additional welfare gains and affecting the level of urban decline and suburban sprawl. Further, the optimal development tax exceeds the (first-best) Pigouvian level, irrespective of whether or not revenues are returned lump-sum to all landowners or earmarked for urban decline mitigation.

scholarly journals Good Booms, Bad Booms

2019 ◽  
Vol 18 (2) ◽  
pp. 618-665 ◽  
Author(s):  
Gary Gorton ◽  
Guillermo Ordoñez
Keyword(s):  
Productivity Growth ◽  
Default Probability ◽  
Careful Examination ◽  
Credit Booms ◽  
Increase In Productivity ◽  
Main Component ◽  
Information Regime ◽  
Credit Boom

Abstract Credit booms are not rare, some end in a crisis (bad booms) whereas others do not (good booms). We document that credit booms start with an increase in productivity growth, which subsequently falls faster during bad booms. We develop a model in which a crisis happens when a credit boom transits toward an information regime with careful examination of collateral. As this examination is more valuable when collateral backs projects with low productivity, crises are more likely during booms that display larger productivity declines. We test the main predictions of the model and identify the default probability as the main component of measured productivity that lies behind crises.

scholarly journals Anticipated Banking Panics

2016 ◽  
Vol 106 (5) ◽  
pp. 554-559 ◽  
Author(s):  
Mark Gertler ◽  
Nobuhiro Kiyotaki ◽  
Andrea Prestipino
Keyword(s):  
Great Recession ◽  
Macroeconomic Model ◽  
Balance Sheets ◽  
The Great Recession ◽  
Banking Panics ◽  
Harmful Effects

We develop a macroeconomic model with banking instability. Sunspot runs can arise that are harmful to the economy. However, whether a run equilibrium exists depends on fundamentals. In contrast to earlier work, the probability of a sunspot run is the outcome of rational forecast based on fundamentals. The model captures the movement from slow to fast runs that was a feature of the Great Recession: A weakening of banks' balance sheets increases the probability of a run, leading depositors to withdraw funds from banks. These slow runs have harmful effects on the economy and set the stage for fast runs.

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