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Robust Macroprudential Policy Rules under Model Uncertainty

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Listed:
  • Binder, Michael
  • Lieberknecht, Philipp
  • Quintana, Jorge
  • Wieland, Volker

Abstract

Against the backdrop of elevated model uncertainty in DSGE models with a detailed modeling of financial intermediaries, we investigate the performance of optimized macroprudential policy rules within and across models. Using three canonical banking DSGE models as a representative sample, we show that model-specific optimized macroprudential policy rules are highly heterogeneous across models and not robust to model uncertainty, implying large losses in other models. This is particularly the case for a perfect-coordination regime between monetary and macroprudential policy. A Stackelberg regime with the central bank as leader operating according to the rule by Orphanides and Wieland (2013) implies smaller potential costs due to model uncertainty. An even more effective approach for policymakers to insure against model uncertainty is to design Bayesian model-averaged optimized macroprudential rules. These prove to be more robust to model uncertainty by performing better across models than model-specific optimized rules, regardless of the regime of interaction between the two authorities.

Suggested Citation

  • Binder, Michael & Lieberknecht, Philipp & Quintana, Jorge & Wieland, Volker, 2018. "Robust Macroprudential Policy Rules under Model Uncertainty," Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181503, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc18:181503
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    References listed on IDEAS

    as
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    Cited by:

    1. Szabolcs Deák & Paul Levine & Afrasiab Mirza & Joseph Pearlman, 2019. "Designing Robust Monetary Policy Using Prediction Pools," School of Economics Discussion Papers 1219, School of Economics, University of Surrey.

    More about this item

    Keywords

    Macroprudential Policy; Optimized Policy Rules; Model Uncertainty; Bayesian Model-Averaging; Robust Policy Rules;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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