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Optimal Policy for Macrofinancial Stability

Author

Listed:
  • Gianluca Benigno
  • Huigang Chen
  • Christopher Otrok
  • Alessandro Rebucci
  • Eric R. Young

Abstract

There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. These normative analyses build upon the concept of constrained efficient allocation where the social planner is constrained by the same borrowing limit that agents face. In this paper, we show that there exists at least one set of tools implementing the constrained efficient allocation that can also be used by a Ramsey planner to replicate an unconstrained allocation, achieving higher welfare. Constrained efficiency may lead to inaccurate characterizations of welfare maximizing policies relative to Ramsey optimal policy.

Suggested Citation

  • Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric R. Young, 2023. "Optimal Policy for Macrofinancial Stability," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(4), pages 401-428, October.
    • Handle: RePEc:aea:aejmac:v:15:y:2023:i:4:p:401-28
    DOI: 10.1257/mac.20200046
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G01 - Financial Economics - - General - - - Financial Crises
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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