Managing Financial Crises

Gianluca Benigno, Alessandro Rebucci () and Aliaksandr Zaretski
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Gianluca Benigno: University of Lausanne and CEPR

No 625, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: In this paper, we revisit the question of how to manage financial crises using the framework proposed by Bianchi and Mendoza (2018). We show that this model economy exhibits a multiplicity of constrained-efficient equilibria, which arises because the private shadow value of collateral influences the forward-looking asset price. Among these equilibria, the specific one studied by Bianchi and Mendoza (2018) can be implemented using a tax/subsidy on debt alone. In that case, both the ex ante tax and ex post subsidy are quantitatively important for welfare under the optimal time-consistent policy. Limiting either component can lead to a welfare loss relative to the unregulated competitive equilibrium, highlighting the complementarity between crisis prevention and crisis resolution tools. We also show that, under certain conditions, all Pareto-dominant constrained-efficient equilibria entail the unconstrained allocation chosen by a social planner subject to the country budget constraint, and this allocation can be implemented with purely ex post policies.

JEL-codes: E61 F38 F44 H23 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2025-10
New Economics Papers: this item is included in nep-dge and nep-opm
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https://repec.som.surrey.ac.uk/2025/DP06-25.pdf (application/pdf)

Related works:
Working Paper: Managing Financial Crises (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0625

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