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

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

By Nobuhiro Kiyotaki, Mark Gertler, Andrea Prestipino

Published in the American  Economic Association

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.

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