Managing Financial Crises

Gianluca Benigno, Alessandro Rebucci and Aliaksandr Zaretski

No 20778, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In this paper, we revisit the question of how to manage financial crises using the framework proposed in 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.

Keywords: Asset prices; Constrained efficiency; Financial crises; Macroprudential policy; Optimal policy; Pecuniary externalities (search for similar items in EconPapers)
JEL-codes: E61 F38 F44 H23 (search for similar items in EconPapers)
Date: 2025-10
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