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Optimal Time-Consistent Macroprudential Policy

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  • Javier Bianchi
  • Enrique G. Mendoza

Abstract

Collateral constraints widely used in models of financial crises feature a pecuniary externality: Agents do not internalize how borrowing decisions taken in “good times” affect collateral prices during a crisis. We show that agents in a competitive equilibrium borrow more than a financial regulator who internalizes this externality. We also find, however, that under commitment the regulator's plans are time-inconsistent, and hence focus on studying optimal, time-consistent policy without commitment. This policy features a state-contingent macroprudential debt tax that is strictly positive at date t if a crisis has positive probability at t + 1. Quantitatively, this policy reduces sharply the frequency and magnitude of crises, removes fat tails from the distribution of returns, and increases social welfare. In contrast, constant debt taxes are ineffective and can be welfare-reducing, while an optimized “macroprudential Taylor rule” is effective but less so than the optimal policy.

Suggested Citation

  • Javier Bianchi & Enrique G. Mendoza, 2013. "Optimal Time-Consistent Macroprudential Policy," NBER Working Papers 19704, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19704 Note: AP EFG IFM ME
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    References listed on IDEAS

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    Cited by:

    1. Anton Korinek & Damiano Sandri, 2016. "Capital Controls or Macroprudential Regulation?," NBER Chapters,in: NBER International Seminar on Macroeconomics 2015 National Bureau of Economic Research, Inc.
    2. repec:eee:moneco:v:89:y:2017:i:c:p:25-44 is not listed on IDEAS
    3. Charles Nolan & Plutarchos Sakellaris & John D. Tsoukalas, 2016. "Optimal Bailout of Systemic Banks," Working Papers 201607, Athens University Of Economics and Business, Department of Economics.
    4. Victoria Nuguer & Jessica Roldan-Pena & Enrique Mendoza & Julio Carrillo, 2016. "When the Central Bank Meets the Financial Authority: Strategic Interactions and Institutional Design," 2016 Meeting Papers 1461, Society for Economic Dynamics.
    5. Cesa-Bianchi, Ambrogio & Rebucci, Alessandro, 2017. "Does easing monetary policy increase financial instability?," Journal of Financial Stability, Elsevier, pages 111-125.
    6. De Fiore, Fiorella & Teles, Pedro & Tristani, Oreste & Correia, Isabel, 2016. "Credit subsidies," Working Paper Series 1877, European Central Bank.
    7. Ozge Akinci & Ryan Chahrour, 2014. "Good News is Bad News: Leverage Cycles and Sudden Stops," Boston College Working Papers in Economics 866, Boston College Department of Economics, revised 30 Apr 2015.
    8. Bianchi, Javier & Liu, Chenxin & Mendoza, Enrique G., 2016. "Fundamentals news, global liquidity and macroprudential policy," Journal of International Economics, Elsevier, pages 2-15.
    9. repec:aeb:wpaper:201607:i:7:y:2016 is not listed on IDEAS
    10. repec:eee:inecon:v:108:y:2017:i:c:p:191-210 is not listed on IDEAS
    11. Junichi Fujimoto & Ko Munakata & Koji Nakamura & Yuki Teranishi, 2017. "Optimal Policy Analysis in a New Keynesian Economy with Credit Market Search," GRIPS Discussion Papers 16-30, National Graduate Institute for Policy Studies.
    12. Ricardo J. Caballero & Alp Simsek, 2017. "A Risk-centric Model of Demand Recessions and Macroprudential Policy," NBER Working Papers 23614, National Bureau of Economic Research, Inc.
    13. Donato Masciandaro, 2014. "Macroeconomic Ideas, Business Cycles and Economic Policies: One Size Doesn’t Fit All - A Primer," BAFFI CAREFIN Working Papers 14161, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    14. Brian P. Greaney & Joseph P. Kaboski & Eva Van Leemput, 2016. "Can Self-Help Groups Really Be "Self-Help"?," Review of Economic Studies, Oxford University Press, pages 1614-1644.
    15. Hewei Shen, 2016. "Financial Crises and the Role of Debt Maturity for Emerging Economies," Caepr Working Papers 2017-012 Classification-D, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    16. Nadav Ben Zeev, 2017. "Exchange Rate Regimes And Sudden Stops," Working Papers 1712, Ben-Gurion University of the Negev, Department of Economics.
    17. Gertler, M. & Kiyotaki, N. & Prestipino, A., 2016. "Wholesale Banking and Bank Runs in Macroeconomic Modeling of Financial Crises," Handbook of Macroeconomics, Elsevier.
    18. repec:eee:jbfina:v:79:y:2017:i:c:p:110-128 is not listed on IDEAS

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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F0 - International Economics - - General
    • G0 - Financial Economics - - General

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