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Optimal credit market policy

Author

Listed:
  • Iacoviello, Matteo
  • Nunes, Ricardo
  • Prestipino, Andrea

Abstract

We study optimal credit market policy in a stochastic, quantitative, general equilibrium, infinite-horizon economy with collateral constraints tied to housing prices. Collateral constraints imply that the competitive equilibrium is Pareto inefficient. Taxing housing or borrowing in good states and subsidizing it in recessions leads to a Pareto-improving allocation for borrowers and savers. Quantitatively, the welfare gains afforded by the optimal tax are significant. The optimal tax reduces the covariance of house prices with consumption, and, by doing so, it increases house prices on average and delivers welfare gains both in steady state and around it. We also show that the welfare gains stem from mopping up after the crash rather than the ex-ante macroprudential aspect, aligning with prior research that emphasizes the importance of ex-post measures compared to preventive policies alone.

Suggested Citation

  • Iacoviello, Matteo & Nunes, Ricardo & Prestipino, Andrea, 2026. "Optimal credit market policy," Journal of Economic Dynamics and Control, Elsevier, vol. 182(C).
    • Handle: RePEc:eee:dyncon:v:182:y:2026:i:c:s0165188925001897
    DOI: 10.1016/j.jedc.2025.105223
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    Keywords

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    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
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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