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DISCUSSION:
Overborrowing, Financial Crisis and
Macroprudential Taxes
By Javier Bianchi, Enrique G.
Mendoza; 2010
Overview
1. Summary
2. Contribution to the literature
3. Extension – Inclusion of banks
3.1 Transmission of shocks to the real economy
3.2 Collateral constraint as sole credit friction
3.3 Different kind of prudential policies
1. Summary
Questions:
1. Does overborrowing cause financial crisis and
drive business cycle fluctuations?
2. Can policy-makers adopt macroprudential
tools to reduce financial fragility?
Motivation: 2008 global financial crisis and
adoption of macroprudential polies in its
aftermath
1. Summary
-
DSGE model with occasionally binding credit constraint calibrated to
annual US data
-
Compare equilibrium outcomes of private borrowing with credit frictions
where agents take asset prices as given versus a social planner's outcome
where the effects of individual actions on asset prices are internalized
-
Thus introducing a macroprudential tax to discourage lending in
unconstraint times taking the amplification of negative asset price
movements with a binding borrowing constraint into account
Results:
Financial crisis in the competitive equilibrium are significantly more frequent
and deep than in the equilibrium attained by the regulator.
2. Contribution of the literature
• Asset prices as key factor driving debt
dynamics and credit externalities
• Quantifies the difference in regulated versus
competitive outcomes in an equilibrium
model of business cycles and asset prices
Overview
1. Summary
2. Contribution to the literature
3. Extension – Inclusion of banks
3.1 Transmission of shocks to the real economy
3.2 Collateral constraint as sole credit friction
3.3 Different kind of prudential policies
3.1 Transmission to the real economy
• Due to aggregation of all private agents into
household-firms, neglects the special role of financial
intermediaries
• Incomplete picture of the transmission of fin. shocks to
the real economy
• Shuts-down important transmission channels of crisis
i.e. bank lending and bank balance sheets channel
3.2 Collateral constraint as sole credit
friction
• The nature of the recent crisis being born out of the
mortgage segment made collateral constraints due to
market movements of asset prices important
• There are financial crisis like the Asian crisis that are
closely linked to overborrowing which were much less
linked to asset price movements in the first place
• Introduction of banks allows for the introduction of
more frictions (i.e. Dib 2010 style)
3.4 Different kinds of macroprudential
policies
• Strain of the literature (i.e. Greenspan 2002,
2011; Blinder and Reis 2005) argues that
restricting in-debtness ex-ante is too costly
compared to “mopping-up” after the crisis
• A model with banks would allow for the
implementation of different kind of
macroprudential policies like counter-cyclical
capital requirements