Optimal Macroprudential Policy and Asset Price Bubbles

Nina Biljanovska, Alexandros Vardoulakis and Lucyna Gornicka
Additional contact information
Nina Biljanovska: International Monetary Fund
Alexandros Vardoulakis: Federal Reserve Board

No 663, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: An asset bubble relaxes collateral constraints and increases borrowing of credit-constrained agents. At the same time, as the bubble deflates when constraints start binding, it amplifies downturns. We show analytically and quantitatively that the macroprudential policy should optimally respond to building asset price bubbles in a non-linear fashion depending on the underlying indebtedness. If credit is moderate, policy should accommodate the bubble to reduce the incidence of binding collateral constraints. If credit is elevated, policy should lean against the bubble more aggressively to mitigate the pecuniary externalities from a deflating bubble when constraints bind.

Date: 2019
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (7)

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Working Paper: Optimal Macroprudential Policy and Asset Price Bubbles (2019)
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