The Gilded Bubble Buffer
Authors
Freixas, Xavier
Perez-Reyna, David
Editor
Publication date
2018-09-17
Document language
eng
Publisher
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Abstract
We provide a microfounded framework for the welfare analysis of macroprudential policy by means of an overlapping generation model where productivity and credit supply are subject to random shocks in order to analyze rational bubbles that can be fueled by banking credit. We find that credit financed bubbles may be welfare improving because of their role as a buffer in channeling excessive credit supply and inefficient investment at the firms' level, but can cause systemic risk. Therefore macroprudential policy plays a key role in improving efficiency while preserving financial stability. Our approach allows us to compare the efficiency of alternative macroprudential policies.
Contrarily to conventional wisdom, we show that macroprudential policy may be efficient even in the absence of systemic risk, that it has to be contingent on productivity shocks, to take into account real interest rates.
Description
Códigos JEL
E44 - Financial Markets and the Macroeconomy, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, G18 - General Financial Markets: Government Policy and Regulation, G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages, G28 - Financial Institutions and Services: Government Policy and Regulation
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Keywords
Bank, Bubble, Macroprudential regulation
