Macroprudential Policies in Low-Income Countries

Filiz Unsal and Margarita Rubio

No 1230, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper, we develop a DSGE model to study the implementation of macroprudential policy in low-income countries (LICs). The model features an economy with two agents; households and entrepreneurs. Entrepreneurs are the borrowers in this economy and need capital as collateral to obtain loans. The macroprudential regulator uses the collateral requirement as the policy instrument. We compare two different ways of implementing the macroprudential policy: permanently increasing the collateral requirement (passive policy) versus an active time-varying rule responding to deviations of credit from its steady state. Results show that with perfect information, an active approach is more effective in increasing financial stability, without incurring in a long-run output cost. However, if the regulator is not able to observe the economic conditions perfectly, which is usually the case in LICs, a passive approach may be preferred.

Date: 2016
New Economics Papers: this item is included in nep-mac
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