Optimal Credit Market Policy

Matteo Iacoviello, Ricardo Nunes and Andrea Prestipino

No 1406, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study optimal credit market policy in a stochastic, quantitative, general equilibrium, infinite-horizon economy with collateral constraints tied to housing prices. Collateral constraints yield a competitive equilibrium that is Pareto inefficient. Taxing housing in good states and subsidizing it in recessions leads to a Pareto-improving allocation for borrowers and savers. Quantitatively, the welfare gains afforded by the optimal tax are significant. The optimal tax reduces the covariance of collateral prices with consumption, and, by doing so, it increases asset prices on average, thus providing welfare gains both in steady state and around it. We also show that the welfare gains stem from mopping up after the crash rather than a pure ex-ante macroprudential aspect, aligning with prior research that emphasizes the importance of ex-post measures compared to preventive policies alone.

Keywords: Credit Market; Housing; Collateral Constraints; Macroprudential Policy; Fiscal Policy; Financial Crises (search for similar items in EconPapers)
JEL-codes: E32 E44 G18 H23 R21 (search for similar items in EconPapers)
Date: 2025-05-09
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Working Paper: Optimal Credit Market Policy (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1406

DOI: 10.17016/IFDP.2025.1406

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