Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153984
Authors: 
Derviz, Alexis
Year of Publication: 
2013
Series/Report no.: 
ECB Working Paper 1551
Abstract: 
We explore the ability of a macroprudential policy instrument to dampen the consequences of equity mispricing (a bubble) and the correction thereof (the bubble bursting), as well as the consequences for real activity in a production economy. In our model, producers are financed by both bank debt and equity, and face a mix of systematic and idiosyncratic uncertainty. Positive/negative bubbles arise when prior public beliefs about the aggregate productivity of producers (business sentiment) become biased upwards/downwards. Economic activity in equilibrium is influenced by the bubble size. The presence of macroprudential policy is represented by a convex dependence of bank capital requirements on the quantity of uncollateralized credit. We find that this kind of policy is more successful in suppressing equity price swings than moderating output fluctuations. Economic activity declines with the introduction of a macroprudential instrument in this model, so that the ultimate welfare contribution of the latter would depend on the aggregate default costs.
Subjects: 
asset price
bank
bubble
credit
Macroprudential policy
JEL: 
G01
G21
G12
E22
D82
Document Type: 
Working Paper

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