TY  - JOUR
AU  - Bianchi,Javier
AU  - Mendoza,Enrique G.
TI  - Overborrowing, Financial Crises and 'Macro-prudential' Taxes
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16091
PY  - 2010
Y2  - June 2010
UR  - http://www.nber.org/papers/w16091
L1  - http://www.nber.org/papers/w16091.pdf
N1  - Author contact info:
Javier Bianchi
Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI 53706-139
Tel: 646/370-9871
E-Mail: javieribianchi@gmail.com

Enrique G. Mendoza
Department of Economics
University of Pennsylvania
3718 Locust Walk
Philadelphia, PA 19104
Tel: 215-898-7701
E-Mail: egme@sas.upenn.edu
AB  - An equilibrium model of financial crises driven by Irving Fisher’s financial amplification mechanism features a pecuniary externality, because private agents do not internalize how the price of assets used for collateral respond to collective borrowing decisions, particularly when binding collateral constraints cause asset fire-sales and lead to a financial crisis. As a result, agents in the competitive equilibrium borrow “too much” ex ante, compared with a financial regulator who internalizes the externality. Quantitative analysis calibrated to U.S. data shows that average debt and leverage are only slightly larger in the competitive equilibrium, but the incidence and magnitude of financial crises are much larger. Excess asset returns, Sharpe ratios and the price of risk are also much larger, and the distribution of returns displays endogenous fat tails. State-contingent taxes on debt and dividends of about 1 and -0.5 percent on average respectively support the regulator’s allocations as a competitive equilibrium.
ER  -