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Macroprudential policymakers with cautious expectations

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  • Gai, Prasanna
  • Haworth, Cameron

Abstract

We introduce cautious expectations to a macroprudential policy model where average growth is traded off against growth-at-risk (GaR). Policymakers with cautious expectations estimate the optimal weight to apply to risk signals, creating biased, historically dependent crisis forecasts. They optimally downweight the effects of risk and their policy settings on GaR forecasts, decreasing the expected efficiency of the growth-GaR trade-off. This loosens the optimal policy stance, but also causes policymakers to respond more aggressively to changing signals. As policymakers experience additional crises, they better understand the effects of their policy instruments and tighten their stance. When past crises are forgotten, this tendency reverses.

Suggested Citation

  • Gai, Prasanna & Haworth, Cameron, 2023. "Macroprudential policymakers with cautious expectations," Economics Letters, Elsevier, vol. 229(C).
    • Handle: RePEc:eee:ecolet:v:229:y:2023:i:c:s0165176523002197
    DOI: 10.1016/j.econlet.2023.111194
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    References listed on IDEAS

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    Cited by:

    1. Mandas, Marco & Goodell, John W., 2025. "The impact of capital-based macroprudential policy on banks’ balance sheet composition," Economics Letters, Elsevier, vol. 253(C).
    2. Kohlhas, Alexandre N. & Robertson, Donald, 2025. "Cautious expectations," Journal of Monetary Economics, Elsevier, vol. 155(S).

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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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises

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