Working Paper: NBER ID: w18675
Authors: Olivier Jeanne; Anton Korinek
Abstract: We study the interplay of optimal ex-ante (macroprudential) and ex-post (monetary or fiscal stimulus) measures to respond to systemic financial crises in a tractable model of fire sales. We find that it is generally optimal to use both, rejecting the Greenspan doctrine to only intervene ex post. Optimal macroprudential policy resolves the time consistency problems associated with stimulus measures. However, if macroprudential policy is suboptimal, for example because of circumvention, only monetary stimulus should be used, and it is desirable to commit to smaller stimulus. Furthermore, accumulating macroprudential tax revenue in a bailout fund used for stimulus measures is undesirable.
Keywords: macroprudential regulation; financial crisis; ex-ante; ex-post; monetary policy
JEL Codes: E44; G18; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal macroprudential policy (E61) | effectiveness of subsequent interventions (C90) |
| suboptimal macroprudential policy (E60) | reliance on monetary stimulus (E63) |
| accumulating macroprudential tax revenue in a bailout fund (F38) | increased borrowing incentives (H74) |
| optimal policy mix (both ex-ante and ex-post interventions) (E63) | mitigation of systemic risks (F65) |
| better macroprudential instruments (E61) | decreased need for ex-post interventions (H53) |
| non-optimal macroprudential policy (E60) | commitment to less generous ex-post interventions (H53) |
| optimal macroprudential policy (E61) | planner's ability to commit to future interventions does not improve outcome (P11) |