Managing Financial Crises / Gianluca Benigno, Alessandro Rebucci, Aliaksandr Zaretski.

Format:

Book

Author/Creator:

Benigno, Gianluca.

Contributor:

Rebucci, Alessandro.

Zaretski, Aliaksandr.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w34410.

NBER working paper series no. w34410

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2025.

Summary:

In this paper, we revisit the question of how to manage financial crises using the framework proposed by Bianchi and Mendoza (2018). We show that this model economy exhibits a multiplicity of constrained-efficient equilibria, which arises because the private shadow value of collateral influences the forward-looking asset price. Among these equilibria, the specific one studied in Bianchi and Mendoza (2018) can be implemented using a tax/subsidy on debt alone. In that case, both the ex ante tax and ex post subsidy are quantitatively important for welfare under the optimal time-consistent policy. Limiting either component can lead to a welfare loss relative to the unregulated competitive equilibrium, highlighting the complementarity between crisis prevention and crisis resolution tools. We also show that, under certain conditions, all Pareto-dominant constrained-efficient equilibria entail the unconstrained allocation chosen by a social planner subject to the country budget constraint, and this allocation can be implemented with purely ex post policies.

Notes:

October 2025.

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