Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/278533 
Year of Publication: 
2023
Series/Report no.: 
ECONtribute Discussion Paper No. 238
Publisher: 
University of Bonn and University of Cologne, Reinhard Selten Institute (RSI), Bonn and Cologne
Abstract: 
We present a theoretical framework to characterize how financial market participants contribute to systemic risk, allowing us to derive optimal corrective policy interventions. To that end, we embed belief heterogeneity in a model of frictional financial markets. We document the asymmetry that, by their behavior, relatively more optimistic agents contribute more strongly to financial distress than more pessimistic agents do. We further show that financial distress is generally more likely in an economy whose agents hold heterogeneous rather than homogeneous beliefs. Based on these findings, we propose a system of non-linear Pigouvian taxes as the optimal corrective policy, which proves to generate considerable welfare gains over the linear policy advocated by former studies.
Subjects: 
Financial amplification
pecuniary externalities
collateral constraint
financial crisis
belief heterogeneity
macroprudential policy
JEL: 
D84
E44
G28
H23
Document Type: 
Working Paper

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