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Optimal Macroprudential Policy: Frictions, Redistribution, and Politics

Listed author(s):
  • andrea prestipino

    (Federal Reserve Board)

  • Ricardo Nunes

    (Federal Reserve Board)

  • Matteo Iacoviello

    (Federal Reserve Board)

We study optimal macroprudential policies in an heterogeneous agent economy with collateral constraints. An enforcement problem results in a collateral constraint that depends on the market value of the borrower's assets. First, we analyze the optimal allocation chosen by a Pareto Planner that cannot solve the enforcement problem faced by the markets and can only affect borrower's policies while taking the supply of credit as given. Second, we study the problem of a Ramsey Planner that can choose taxes that affect both the demand and supply of credit. While the standard macroprudential motive would make it optimal for the Planner to reduce total borrowing, the competitive equilibrium of our model can also feature under-borrowing when the borrower's initial wealth is low enough. Since the model explicitly considers both borrowers and savers, the choice of the loan-to-value ratio and the taxes on assets and borrowing induce distributional effects. We find that the presence of over-borrowing critically depends on only taking into account the welfare of borrowers while disregarding that of savers.

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Paper provided by Society for Economic Dynamics in its series 2016 Meeting Papers with number 1602.

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Date of creation: 2016
Handle: RePEc:red:sed016:1602
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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