Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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