Citations (13)



Overborrowing, Financial Crises and ‘Macro-Prudential’ Policy?

Javier Bianchi

University of Wisconsin - Madison

Enrique G. Mendoza

University of Pennsylvania; National Bureau of Economic Research (NBER)

February 2011

IMF Working Paper No. 11/24

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.

Number of Pages in PDF File: 54

Keywords: Borrowing, Business cycles, Credit, Economic models, Financial crisis, Global Financial Crisis 2008-2009

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Date posted: February 7, 2011  

Suggested Citation

Bianchi, Javier and Mendoza, Enrique G., Overborrowing, Financial Crises and ‘Macro-Prudential’ Policy? (February 2011). IMF Working Papers, Vol. , pp. 1-53, 2011. Available at SSRN: http://ssrn.com/abstract=1755441

Contact Information

Javier Ignacio Bianchi
University of Wisconsin - Madison ( email )
716 Langdon Street
Madison, WI 53706-1481
United States
Enrique G. Mendoza
University of Pennsylvania ( email )
Philadelphia, PA 19104
United States
HOME PAGE: http://www.sas.upenn.edu/~egme/index.html
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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