Credit Booms, Financial Crises and Macroprudential Policy
We develop a model of banking crises which Is consistent with two important features of the data: First, banking crises are usually preceded by credit booms. Second, credit booms often do not result in a crisis. That is, there are "good" booms as well as "bad" booms in the language of Gorton and Ordonez (2019). We then consider how the optimal macroprudential policy weighs the benefits of preventing a crisis against the costs of stopping a good boom. We show that countercyclical capital buffers are a critical feature of a successful macropudential policy.
We would like to thank the participants of various seminars and conferences, particularly Juliane Begenau, Jonathan Heathcote, Urban Jermann, Vincenzo Quadrini and Alejandro Van der Ghote for thoughtful comments. The Financial Support of the National Science Foundation is gratefully acknowledged. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Mark Gertler & Nobuhiro Kiyotaki & Andrea Prestipino, 2020. "Credit booms, financial crises, and macroprudential policy," Review of Economic Dynamics, vol 37, pages S8-S33.