Working Paper: NBER ID: w24050
Authors: Gideon Bornstein; Guido Lorenzoni
Abstract: Policy discussions on financial market regulation tend to assume that whenever a corrective policy is used ex post to ameliorate the effects of a crisis, there are negative side effects in terms of moral hazard ex ante. This paper shows that this is not a general theoretical prediction, focusing on the case of monetary policy interventions ex post. In particular, we show that if the central bank does not intervene by monetary easing following a crisis, this creates an aggregate demand externality that makes borrowing ex ante inefficient. If instead the central bank follows the optimal discretionary policy and intervenes to stabilize asset prices and real activity, we show examples in which the aggregate demand externality disappears, reducing the need for ex ante intervention.
Keywords: No keywords provided
JEL Codes: E52; E61; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of intervention (I12) | inefficient borrowing (H74) |
| implementation of countercyclical policy (E61) | reduce overborrowing (G51) |
| passive monetary policy (E63) | worsen leverage issues (F65) |
| unconventional monetary policy (E59) | reduce necessity for stricter regulations (L51) |