Economics at your fingertips  

Financial Stability with Fire Sale Externalities

Ryuichiro Izumi and Yang Li ()
Additional contact information
Yang Li: Nankai University

No 2021-002, Wesleyan Economics Working Papers from Wesleyan University, Department of Economics

Abstract: Do policies that aim to mitigate firre sale externalities improve financial stability? We study this question in a model of financial intermediation where banks may sell long-term assets in financial markets subject to cash-in-the-market pricing and bank runs. In the absence of interventions, banks hold more long-term assets than is socially optimal, leading to ineciently large fire sales in a crisis. Regulating banks' short-term liabilities and portfolio choices can mitigate this externality. We show, however, that in economies with high market liquidity, such interventions actually increase financial fragility. In such a case, policymakers must balance the desire to mitigate the externality with financial stability considerations.

Keywords: Fire sale; Pecuniary externalities; Macroprudential policies; Financial fragility (search for similar items in EconPapers)
JEL-codes: E44 G21 G28 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2021-05
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Wesleyan Economics Working Papers from Wesleyan University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Manolis Kaparakis ().

Page updated 2022-09-29
Handle: RePEc:wes:weswpa:2021-002