Credit Booms, Financial Crises and Macroprudential Policy

65 Pages Posted: 7 Jul 2020

See all articles by Mark Gertler

Mark Gertler

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Nobuhiro Kiyotaki

Princeton University - Department of Economics

Andrea Prestipino

Board of Governors of the Federal Reserve System

Date Written: July 2020

Abstract

We develop a model of banking crises which Is consistent with two important features of the data: First, banking crises are usually preceded by credit booms. Second, credit booms often do not result in a crisis. That is, there are "good" booms as well as "bad" booms in the language of Gorton and Ordonez (2019). We then consider how the optimal macroprudential policy weighs the benefits of preventing a crisis against the costs of stopping a good boom. We show that countercyclical capital buffers are a critical feature of a successful macropudential policy.

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Suggested Citation

Gertler, Mark and Kiyotaki, Nobuhiro and Prestipino, Andrea, Credit Booms, Financial Crises and Macroprudential Policy (July 2020). NBER Working Paper No. w27481, Available at SSRN: https://ssrn.com/abstract=3644083

Mark Gertler (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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Nobuhiro Kiyotaki

Princeton University - Department of Economics ( email )

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Andrea Prestipino

Board of Governors of the Federal Reserve System ( email )

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