Optimal Time-Consistent Macroprudential Policy

Javier Bianchi and Enrique Mendoza

No 19704, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E0 F0 G0 (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mac
Note: AP EFG IFM ME
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Citations: View citations in EconPapers (45)

Published as Javier Bianchi & Enrique G. Mendoza, 2018. "Optimal Time-Consistent Macroprudential Policy," Journal of Political Economy, vol 126(2), pages 588-634.

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Related works:
Journal Article: Optimal Time-Consistent Macroprudential Policy (2018)
Working Paper: Optimal time-consistent macroprudential policy (2015)
Working Paper: Optimal Time-Consistent Macroprudential Policy (2015)
Working Paper: Optimal Time-Consistent Macroprudential Policy (2015)
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