Fundamentals News, Global Liquidity and Macroprudential Policy

35 Pages Posted: 19 Nov 2016

See all articles by Javier Bianchi

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Chenxin Liu

University of Wisconsin - Madison - Department of Economics

Enrique G. Mendoza

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

Date Written: December 5, 2015

Abstract

We study optimal macroprudential policy in a model in which unconventional shocks, in the form of news about future fundamentals and regime changes in world interest rates,interact with collateral constraints in driving the dynamics of financial crises. These shocks strengthen incentives to borrow in good times (i.e. when "good news" about future fundamentals coincide with a low-world-interest-rate regime), thereby increasing vulnerability to crises and enlarging the pecuniary externality due to the collateral constraints. Quantitatively, an optimal schedule of macroprudential debt taxes can lower the frequency and magnitude of financial crises, but the policy is complex because it features significant variation across interest-rate regimes and news realizations.

Keywords: Financial crises, macroprudential policy, systemic risk, global liquidity, news shocks

JEL Classification: D62, E32, E44, F32, F41

Suggested Citation

Bianchi, Javier and Liu, Chenxin and Mendoza, Enrique G., Fundamentals News, Global Liquidity and Macroprudential Policy (December 5, 2015). PIER Working Paper No. 15-043, Available at SSRN: https://ssrn.com/abstract=2872258 or http://dx.doi.org/10.2139/ssrn.2872258

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Chenxin Liu

University of Wisconsin - Madison - Department of Economics ( email )

William H. Sewell Social Science Building
1180 Observatory Drive
Madison, WI 53706-1393
United States

Enrique G. Mendoza (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

HOME PAGE: http://www.sas.upenn.edu/~egme/index.html

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