Banking Panics as Endogenous Disasters and the Welfare Gains from Macroprudential Policy

Mark Gertler, Nobuhiro Kiyotaki and Andrea Prestipino

AEA Papers and Proceedings, 2020, vol. 110, 463-69

Abstract: We study the welfare effects of macroprudential policy in a macroeconomic model of banking instability. Banking panics are endogenous economic disasters caused by banks' excessive leverage during credit booms. The model matches the frequency and severity of banking panics and the statistical relationship between panics and credit booms. A simple countercyclical macroprudential rule can achieve non-negligible welfare gains. These gains rise substantially when the run probability increases during a credit boom and, ex post, if a run is actually avoided. In a model without panics in which financial crises are driven by fundamentals only, the gains are much more limited.

JEL-codes: E32 E44 G01 G21 G28 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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DOI: 10.1257/pandp.20201022

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