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Macroprudential policy under incomplete information

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  • Margarita Rubio
  • D. Filiz Unsal

Abstract

In this paper, we use a DSGE model to study the passive and time-varying implementation of macroprudential policy when policy-makers have noisy and lagged data. The model features an economy with two agents; households and entrepreneurs. Entrepreneurs are the borrowers in this economy and need capital as collateral to obtain loans. The macroprudential regulator uses the collateral requirement as the policy instrument. In this set-up, we compare policy performances of permanently increasing the collateral requirement (passive policy) versus a time-varying (active) policy which responds to credit developments. Results show that with perfect and timely information, an active approach is welfare superior, since it is more effective in providing financial stability with no long-run output cost. If the policy-maker is not able to observe the economic conditions perfectly or observe with a lag, a cautious (less aggressive) policy or even a passive approach may be preferred. However, the latter comes at the expense of increasing inequality and a long-run output cost, which could outweigh their macroeconomic and financial stability benefits.

Suggested Citation

  • Margarita Rubio & D. Filiz Unsal, 2020. "Macroprudential policy under incomplete information," The European Journal of Finance, Taylor & Francis Journals, vol. 26(7-8), pages 616-639, May.
    • Handle: RePEc:taf:eurjfi:v:26:y:2020:i:7-8:p:616-639
    DOI: 10.1080/1351847X.2019.1679209
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    Cited by:

    1. Kozlovtceva, Irina & Penikas, Henry & Petreneva, Ekaterina & Ushakova, Yulia, 2022. "Macroprudential policy efficiency in Russia: Assessment for the uncollateralized consumer loans," Emerging Markets Review, Elsevier, vol. 52(C).
    2. Park, Sungmin & Kim, Young-Han, 2023. "The impact of macroprudential policy on inequality and implications for inclusive financial stability," Journal of Banking & Finance, Elsevier, vol. 146(C).

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