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Macroprudential Regulation versus mopping up after the crash

Olivier Jeanne and Anton Korinek

The Review of Economic Studies, 2020, vol. 87, issue 3, 1470-1497

Abstract: How should macroprudential policy be designed when policymakers also have access to liquidity provision tools to manage crises? We show in a tractable model of systemic banking risk that there are three factors at play: first, ex post liquidity provision mitigates financial crises, and this reduces the need for macroprudential policy. In the extreme, if liquidity provision is untargeted and costless or if it completely forestalls crises by credible out-of-equilibrium lending-of-last-resort, there is no role left for macroprudential regulation. Second, however, macroprudential policy needs to consider the ex ante incentive effects of targeted liquidity provision. Third, if shadow banking reduces the effectiveness of macroprudential instruments, it is optimal to commit to less generous liquidity provision as a second-best substitute for macroprudential policy.

Keywords: Financial crises; Systemic risk; Financial amplification; Macroprudential regulation; Liquidity provision; E44; G18; H23 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (46)

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Working Paper: Macroprudential Regulation Versus Mopping Up After the Crash (2013) Downloads
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The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

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