Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/228214
Authors: 
Corrado, Luisa
Schuler, Tobias
Year of Publication: 
2019
Series/Report no.: 
ECB Working Paper No. 2336
Abstract: 
This paper analyzes the effects of several policy instruments for mitigating 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, allow for interbank trading and show how a credit bubble can develop from a financial innovation. We then 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 highest. We therefore provide a rationale for the use of countercyclical capital buffers.
Subjects: 
Basel III
credit-to-GDP gap
CCyB
JEL: 
E44
E52
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3905-8
Document Type: 
Working Paper

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