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  4. May 2020
  5. Banking Panics as Endogenous Disasters and the Welfare Gains from Macroprudential Policy

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

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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.

Citation

Gertler, Mark, Nobuhiro Kiyotaki, and Andrea Prestipino. 2020. "Banking Panics as Endogenous Disasters and the Welfare Gains from Macroprudential Policy." AEA Papers and Proceedings, 110: 463-69. DOI: 10.1257/pandp.20201022

Additional Materials

JEL Classification

  • E32 Business Fluctuations; Cycles
  • E44 Financial Markets and the Macroeconomy
  • G01 Financial Crises
  • G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
  • G28 Financial Institutions and Services: Government Policy and Regulation