Cover IMF Working Papers
Overborrowing, Financial Crises and ‘Macro-prudential’ Policy
Author: Mr. Enrique G. Mendoza and Javier Bianchi
Series:
IMF Working Papers
Volume/Issue:
Volume 2011: Issue 024
Language:
English
Publication Date:
01 Feb 2011
DOI:
https://doi.org/10.5089/9781455216710.001
ISBN:
9781455216710
ISSN:
1018-5941
Pages:
53
Keywords:
WP; fixed price; interest rate; mover accent; working capital
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund