Macroprudential policymakers with cautious expectations

Prasanna Gai and Cameron Haworth

Economics Letters, 2023, vol. 229, issue C

Abstract: We introduce cautious expectations to a macroprudential policy model where average growth is traded off against growth-at-risk (GaR). Policymakers with cautious expectations estimate the optimal weight to apply to risk signals, creating biased, historically dependent crisis forecasts. They optimally downweight the effects of risk and their policy settings on GaR forecasts, decreasing the expected efficiency of the growth-GaR trade-off. This loosens the optimal policy stance, but also causes policymakers to respond more aggressively to changing signals. As policymakers experience additional crises, they better understand the effects of their policy instruments and tighten their stance. When past crises are forgotten, this tendency reverses.

Keywords: Cautious expectations; Macroprudential policy; Growth-at-risk (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 G01 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:229:y:2023:i:c:s0165176523002197

DOI: 10.1016/j.econlet.2023.111194

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