Fundamentals News, Global Liquidity and Macroprudential Policy*

Enrique Mendoza, Javier Bianchi and Chenxin Liu ()
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Chenxin Liu: Department of Economics, UW-Madison

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

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 (search for similar items in EconPapers)
JEL-codes: D62 E32 E44 F32 F41 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2016-12-05, Revised 2016-12-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (46)

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Related works:
Chapter: Fundamentals News, Global Liquidity, and Macroprudential Policy (2016)
Journal Article: Fundamentals news, global liquidity and macroprudential policy (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:15-043

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