Abstract
Summary In this paper we analyze financial crises and the interactions of macroprudential policy and credit. Financial crises are recurrent systemic phenomena, often triggering deep and long-lasting recessions with large reductions in aggregate welfare, output and employment Importantly for policy, systemic financial crises are typically not random events triggered by exogenous events, but they tend to occur after periods of rapid, strong credit growth. Moreover, a credit crunch tends to follow in a financial crisis with negative aggregate real effects Macroprudential policy softens the credit supply cycles, with important positive effects on the aggregate real economy in crisis times.
Highlights
In this paper we analyze financial crises and the interactions of macroprudential policy and credit
This paper offers a summary on some benefits and costs of some macroprudential policies from a book that I co-authored with Xavier Freixas and Luc Laeven on “Systemic Risk, Crises and Macroprudential Policy” and a forthcoming paper at the Journal of Political Economy on “Macroprudential Policy, Countercyclical Bank Capital Buffers and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments,” co-authored with Gabriel Jiménez, Steven Ongena and Jesús Saurina
All in all, responding to the urgent interest among policymakers and academics, Jimenez et al (2015) is the first empirical paper to estimate the impact of a macroprudential policy on credit supply cycles and their associated real effects
Summary
In this paper we analyze financial crises and the interactions of macroprudential policy and credit. G., large unemployment or poverty, large fiscal costs, and even political extremism).1 Their damaging real effects have generated a broad agreement among academics and policymakers that financial regulation needs to get a macroprudential dimension that aims to lessen the negative externalities from the financial to the macro real sector, as in a credit crunch in a financial crisis caused by the weakening in banks’ balance-sheets (both bank capital and liquidity crunch). It is important for policy makers, academics and even citizens to understand the ex-ante determinants of credit booms and their ex-post consequences of credit crunches, and how public policy can ameliorate the likelihood and costs of financial crises. A key message that I want to convey here is that, in order to limit systemic risk effects, it is crucial to reduce excessive debt – leverage levels and acceleration – in times of growth, and to reduce the costs to the economy of excessive debt in times of crisis (mainly because debt is non-contingent, i. e., defaults and renegotiations are difficult)
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