Financial Development and Global Imbalances

Mendoza, Enrique G.; Quadrini, Vincenzo

doi:10.1016/b978-0-12-397875-2.00020-9

Cited by 2 publications

(2 citation statements)

References 32 publications

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“…The idea that the demand for safe and liquid assets drives down yields and can have important eects for the banking sector is at the center of Bernanke (2005) savings glut hypothesis, formalized rst by Caballero, Farhi, and Gourinchas (2008) and subsequently discussed in e.g. Caballero and Krishnamurthy (2009), Mendoza, Quadrini, and Rios-Rull (2009), and Gorton, Lewellen, and Metrick (2012). The present paper embeds this idea and analyzes its importance for optimal bank capital regulation in a quantitative setting.…”

Section: Related Literaturementioning

confidence: 87%

Capital requirements, risk choice, and liquidity provision in a business-cycle model

Begenau¹

2020

Journal of Financial Economics

127

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This paper develops a quantitative dynamic general equilibrium model in which households' preferences for safe and liquid assets constitute a violation of Modigliani and Miller. I show that the scarcity of these coveted assets created by increased bank capital requirements can reduce overall bank funding costs and increase bank lending. I quantify this mechanism in a two-sector business cycle model featuring a banking sector that provides liquidity and has excessive risk-taking incentives. Under reasonable parametrizations, the marginal benet of higher capital requirements related to this channel signicantly exceeds the marginal cost, indicating that US capital requirements have been sub-optimally low.

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Section: Related Literaturementioning

confidence: 87%

Capital requirements, risk choice, and liquidity provision in a business-cycle model

Begenau¹

2020

Journal of Financial Economics

127

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“…Chinn () provides a comprehensive survey of the literature on fiscal multipliers, D'Erasmo et al . () survey the literature on public debt sustainability and quantitative macro models of fiscal policy, and Mendoza and Quadrini () review the literature on global demand for liquid assets driven by financial underdevelopment.…”

Section: Introductionmentioning

confidence: 99%

The Public Debt Crisis of the United States

Mendoza

2017

The Manchester School

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Since the birth of the Republic, the United States has gone through five debt-crisis episodes defined as year-on-year increases in net federal debt in the 95-percentile. The Great Recession is the second largest, and the only one in which primary deficits continue six years later and are expected to persist at least through 2026. Persistent deficits are also sharply at odds with the surpluses that contributed to the reversal of all major debt surges in U.S. history. There is a view that high debt is not a concern and more debt is needed for fiscal stimulus and/or strong global demand for safe assets. This paper makes four points to the contrary based on findings from the literature: First, empirical work shows that debt sustainability conditions display a significant break after 2008 and fiscal stimulus fails when debt is high. Second, a dynamic general equilibrium model predicts that tax adjustments may not make the debt sustainable and will have adverse effects on macro aggregates and social welfare. Third, the strong appetite for U.S. public debt worldwide can be a slow-moving, transitory result from financial globalization in an environment in which U.S. financial markets are relatively more developed and the expected financing needs of the U.S. government are large. Fourth, domestic sovereign default could become optimal if the cost of regressive redistribution in order to make debt payments outweighs default costs related to the social value of debt for liquidity provision, self-insurance and risk-sharing.

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Financial Development and Global Imbalances

Cited by 2 publications

References 32 publications

Capital requirements, risk choice, and liquidity provision in a business-cycle model

Capital requirements, risk choice, and liquidity provision in a business-cycle model

The Public Debt Crisis of the United States

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