Macroprudential Regulation Versus Mopping Up After the Crash

Olivier Jeanne, Anton Korinek

NBER Working Paper No. 18675
Issued in January 2013, Revised in February 2016
NBER Program(s):Corporate Finance, Economic Fluctuations and Growth, International Finance and Macroeconomics

We study the interplay of optimal ex-ante (macroprudential) and ex-post (monetary or fiscal stimulus) measures to respond to systemic financial crises in a tractable model of fire sales. We find that it is generally optimal to use both, rejecting the Greenspan doctrine to only intervene ex post. Optimal macroprudential policy resolves the time consistency problems associated with stimulus measures. However, if macroprudential policy is suboptimal, for example because of circumvention, only monetary stimulus should be used, and it is desirable to commit to smaller stimulus. Furthermore, accumulating macroprudential tax revenue in a bailout fund used for stimulus measures is undesirable.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w18675

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