Robust Optimal Macroprudential Policy

Federico Bennett, Giselle Montamat and Francisco Roch
Additional contact information
Federico Bennett: Duke University
Giselle Montamat: Uber

No 141, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: We consider how fear of model misspecification on the part of the planner and/or the households affects welfare gains from optimal macroprudential taxes in an economy with occasionally binding collateral constraints as in Bianchi (2011). In this setup, the decentralized equilibrium may differ from the social planner’s equilibrium both because of the pecuniary externalities associated with the collateral constraint and because of the paternalistic imposition of the planner’s beliefs when designing policy. When robust agents have doubts about the model, they create endogenous worst-case beliefs by assigning a high probability to low-utility events. The ratio of worst-case beliefs of the planner over the household’s captures the degree of paternalism. We show that this novel channel could render the directions of welfare gains from a policy intervention ambiguous. However, our quantitative results suggest that doubts about the model need to be large in order to make a “laissez-faire regime” better than an intervention regime.

Keywords: Robust Control; Model Uncertainty; Optimal Taxation; Sudden Stops; Financial Crises (search for similar items in EconPapers)
JEL-codes: D62 E32 E44 E62 F32 F41 G01 H21 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2022-05
New Economics Papers: this item is included in nep-ban, nep-dem, nep-dge, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://rednie.eco.unc.edu.ar/files/DT/141.pdf (application/pdf)

Related works:
Journal Article: Robust optimal macroprudential policy (2023)
Working Paper: Robust Optimal Macroprudential Policy (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:141

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