Essays on banking crises, sovereign default, and macroprudential policy Öffentlichkeit

Abstract

Chapter 1 studies the optimal regulation of a banking system in a quantitative general equilibrium environment with endogenously incomplete markets. Financial intermediaries issue deposits to households under limited liability and with limited enforcement, invest in the real economy with state-contingent returns, and face survival risk. Pecuniary externalities affect the forward-looking bank value and the value of default through asset prices and asset returns, justifying system-wide regulation, e.g., balance sheet taxation or minimum capital requirements. An alternative way to improve welfare is through "preemptive bailouts": expected future transfers relax the current financial constraints, mitigating the enforcement friction and decreasing the probability of financial crises.

Chapter 2 explores the normative implications of the transmission of sovereign risk to the banking sector. Both banks and foreign lenders invest in risky sovereign debt. The sovereign's financial standing is a two-state Markov chain calibrated to match the observed sovereign default and exclusion events. The resulting Markov-switching DSGE model is solved using global methods. Subsidizing lending to the real sector in both good and bad times improves welfare and reduces the probability of banking crises. A bank net worth subsidy in good times combined with a tax in bad times achieves qualitatively similar but quantitatively smaller effects.

Chapter 3 characterizes optimal government policy in a sticky-price economy with different types of consumers and endogenous financial constraints in the banking and entrepreneurial sectors. The competitive equilibrium allocation is constrained inefficient due to pecuniary externalities and other externalities arising from consumer type heterogeneity. These externalities can be corrected with appropriate fiscal instruments. Independently of the availability of such instruments, optimal monetary policy aims to achieve price stability in the long run, as in the conventional New Keynesian environment. Compared to the competitive equilibrium, the constrained efficient allocation significantly improves between-agent risk sharing, approaching the unconstrained Pareto optimum and leading to sizable welfare gains. Such an allocation has lower leverage in the banking and entrepreneurial sectors and is less prone to the boom-bust financial crises and zero-lower-bound episodes observed occasionally in the decentralized economy.

Table of Contents

1 Optimal macroprudential policy with preemptive bailouts 1

1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1.2 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1.2.1 Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

1.2.2 Bankers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

1.2.3 Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

1.2.4 Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1.2.5 Market clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1.2.6 Competitive equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1.3 Normative analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

1.3.1 Sources of inefficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

1.3.2 Constrained efficient allocation under commitment . . . . . . . . . . . . . . . 20

1.3.3 Markov perfect equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

1.3.4 Implementation with taxes, transfers, and capital requirements . . . . . . . . 29

1.4 Quantitative results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

1.4.1 Calibration and computation . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

1.4.2 Bank solvency and EC regimes . . . . . . . . . . . . . . . . . . . . . . . . . . 34

1.4.3 Financial crises in the unregulated economy . . . . . . . . . . . . . . . . . . . 37

1.4.4 Markov perfect equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

1.4.5 Ramsey equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

1.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

1.A Proofs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

1.A.1 Proposition 1.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

1.A.2 Lemma 1.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

1.A.3 Proposition 1.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

1.A.4 Proposition 1.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

1.A.5 Proposition 1.4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

2 Sovereign risk, banking crises, and macroprudential policy 73

2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

2.2 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

2.2.1 Sovereign debt market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

2.2.2 Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

2.2.3 Bankers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

2.2.4 Final good producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

2.2.5 Capital good producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

2.2.6 Foreign lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

2.2.7 Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

2.2.8 Market clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

2.3 Quantitative analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

2.3.1 Calibration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

2.3.2 Crisis experiments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

2.4 Macroprudential policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

2.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

2.A Aggregate budget constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

2.B Solution method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

3 Financial constraints, risk sharing, and optimal monetary policy 95

3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

3.2 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

3.2.1 Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

3.2.2 Bankers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

3.2.3 Entrepreneurs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

3.2.4 Capital, retail, and final good production . . . . . . . . . . . . . . . . . . . . 106

3.2.5 Market clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

3.2.6 Competitive equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

3.3 Normative analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

3.3.1 Flexible-price economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

3.3.2 Sticky-price economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

3.4 Quantitative results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

3.4.1 Calibration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

3.4.2 Welfare comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

3.4.3 Risk sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

3.4.4 Wedges and overborrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

3.4.5 Financial crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

3.4.6 Zero lower bound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140

3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

3.A Proofs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

3.A.1 Lemma 3.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

3.A.2 Lemma 3.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

3.A.3 Lemma 3.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

3.A.4 Proposition 3.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

3.A.5 Proposition 3.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

3.A.6 Lemma 3.4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

3.A.7 Lemma 3.5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

3.A.8 Proposition 3.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

3.A.9 Proposition 3.4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

3.A.10 Proposition 3.5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

Bibliography 166

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School	Laney Graduate School
Department	Economics
Degree	Ph.D.
Submission	Dissertation
Language	English
Research Field	Economics, General Economics, Theory
Stichwort	financial crises sovereign default macroprudential policy monetary policy
Committee Chair / Thesis Advisor	Rubio-Ramirez, Juan, Emory University Yue, Vivian, Emory University
Committee Members	Waggoner, Daniel, Federal Reserve Bank of Atlanta Chen, Kaiji, Emory University

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