European Parliament Library

Overborrowing, Financial Crises and ‘Macro-prudential’ Policy, Enrique Mendoza, Javier Bianchi

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
Table Of Contents
Cover Page; Title Page; Copyright Page; Contents; I. Introduction; II. Competitive Equilibrium; 2.1 Private Optimality Conditions; 2.2 Recursive Competitive Equilibrium; III. Constrained-Efficient Equilibrium; 3.1 Equilibrium without Collateral Constraint; 3.2 Recursive Constrained-Efficient Equilibrium; 3.3 Comparison of Equilibria & 'Macro-Prudential' Policy; IV. Quantitative Analysis; 4.1 Calibration; 1. Calibration; 4.2 Borrowing decisions; 1. Bond Decision Rules (left panel) and Land Pricing Function (Right Panel) for a Negative Two-Standard-Deviations TFP Shock
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (80 p.)
Specific Material Designation
Form Of Item

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