Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/198782 
Year of Publication: 
2018
Series/Report no.: 
CESifo Working Paper No. 7422
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper analyzes the effects of several policy instruments to mitigate financial bubbles generated in the banking sector. We augment a New Keynesian macroeconomic framework by endogenizing boundedly-rational expectations on asset values of loan portfolios and allow for interbank trading. We then show how a financial bubble can develop from a financial innovation. By incorporating a loan management technology and a bank equity channel we can evaluate the efficacy of several policy instruments in counteracting financial bubbles. We find that an endogenous capital requirement reduces the impact of a financial bubble significantly while central bank intervention (“leaning against the wind”) proves to be less effective. A welfare analysis ranks the policy reaction through an endogenous capital requirement as best.
Subjects: 
financial bubbles
credit-to-GDP gap
endogenous capital requirement
stabilization policies
JEL: 
E44
E52
Document Type: 
Working Paper
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