Credit spreads, financial crises, and macroprudential policy

Ozge Akinci and Albert Queraltó
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Albert Queraltó: https://www.federalreserve.gov/econres/albert-queralto.htm

No 802, Staff Reports from Federal Reserve Bank of New York

Abstract: Credit spreads display occasional spikes and are more strongly countercyclical in times of financial stress. Financial crises are extreme cases of this nonlinear behavior, featuring skyrocketing credit spreads, sharp losses in bank equity, and deep recessions. We develop a macroeconomic model with a banking sector in which banks? leverage constraints are occasionally binding and equity issuance is endogenous. The model captures the nonlinearities in the data and produces quantitatively realistic crises. Precautionary equity issuance makes crises infrequent but does not prevent them altogether. When determining the intensity of capital requirements, the macroprudential authority faces a trade-off between the benefits of reducing the risk of a financial crisis and the welfare losses associated with banks? constrained ability to finance risky capital investments..

Keywords: financial stability policy; leverage constraints; financial intermediation; occasionally binding constraints; sudden stops (search for similar items in EconPapers)
JEL-codes: E32 E44 F41 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2016-11-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
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