Optimal Time-Consistent Macroprudential Policy

Javier Bianchi and Enrique Mendoza

Journal of Political Economy, 2018, vol. 126, issue 2, 588 - 634

Abstract: Collateral constraints widely used in models of financial crises feature a pecuniary externality: Agents do not internalize how borrowing decisions made in “good times” affect collateral prices during a crisis. We show that under commitment the optimal financial regulator’s plans are time inconsistent and study time-consistent policy. Quantitatively, this policy reduces sharply the frequency and magnitude of crises, removes fat tails from the distribution of asset 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 time-consistent policy.

Date: 2018
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Citations: View citations in EconPapers (172)

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Related works:
Working Paper: Optimal time-consistent macroprudential policy (2015)
Working Paper: Optimal Time-Consistent Macroprudential Policy (2015)
Working Paper: Optimal Time-Consistent Macroprudential Policy (2015)
Working Paper: Optimal Time-Consistent Macroprudential Policy (2013)
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