Financial Regulation

2016
Bubbles and Central Banks: Historical Perspectives
Brunnermeier, Markus K, and Isabel Schnabel. “Bubbles and Central Banks: Historical Perspectives”. Central Banks at a Crossroads: What Can We Learn from History? . Cambridge, UK: Cambridge University Press, 2016. Web. Publisher's VersionAbstract

This paper reviews some of the most prominent asset price bubbles from the past 400 years and documents how central banks (or other institutions) reacted to those bubbles. The historical evidence suggests that the emergence of bubbles is often preceded or accompanied by an expansionary monetary policy, lending booms, capital inflows, and financial innovation or deregulation. We find that the severity of the economic crisis following the bursting of a bubble is less linked to the type of asset than to the financing of the bubble – crises are most severe when they are accompanied by a lending boom, high leverage of market players, and when financial institutions themselves are participating in the buying frenzy. Past experience also suggests that a purely passive “cleaning up the mess” stance towards inflating bubbles in many cases is costly. At the same time, while interest-rate leaning policies and macroprudential tools can and sometimes have helped to deflate bubbles and mitigate the associated economic crises, the correct implementation of such proactive policy approaches remains fraught with difficulties.

Bubbles_CentralBanks_Historical.pdf Bubbles_CentralBanks slides.pdf
2014
Brunnermeier, Markus K, and Martin Oehmke. “Predatory Short Selling”. Review of Finance 18.6 (2014): , 18, 6, 2153-2195. Web. Publisher's VersionAbstract

Financial institutions may be vulnerable to predatory short selling. When
the stock of a financial institution is shorted aggressively, leverage constraints imposed by short-term creditors can force the institution to liquidate long-term investments at fire sale prices. For financial institutions that are sufficiently close to their leverage constraints, predatory short selling equilibria co-exist with no-liquidation equilibria (the vulnerability region) or may even be the unique equilibrium outcome (the doomed region). Increased coordination among short sellers expands the doomed region, where liquidation is the unique equilibrium. Our model provides a potential justification for temporary restrictions on short selling of vulnerable institutions and can be used to assess recent empirical evidence on short-sale bans.

Predatory Short Selling.pdf

Winner of Pagano-Zechner Prize

2009
The fundamental principles of financial regulation
Brunnermeier, Markus K, et al. The fundamental principles of financial regulation. Geneva London: International Center for Monetary and Banking Studies Centre for Economic Policy Research, 2009. Print. geneva11.pdf