Optimal Macroprudential Policy and Investment

Fabian Knapp

VfS Annual Conference 2024 (Berlin): Upcoming Labor Market Challenges from Verein für Socialpolitik / German Economic Association

Abstract: This paper studies optimal time-consistent macroprudential policy in a model with financial frictions and endogenous capital formation. Like in previous studies, which assumed that productive capital is either fixed or absent, optimal macroprudential policy disincentivizes borrowing ex ante and supports borrowing when fire sales emerge. Yet, in an economy with endogenous capital formation, macroprudential policy harms capital formation and reduces the stock of collateral, such that the optimal policy in non-crisis times intervenes less than under fixed or no capital. Different to an economy without capital formation, this policy yields modest results in terms of crisis prevention and welfare gains. The combination of macroprudential policy with investment policy eliminates most crises and leads to substantially higher welfare gains, outperforming pure macroprudential policy. Under this policy mix borrowing is disincentivized more strongly and investment is supported ex ante.

Keywords: Macroprudential Policy; Investment; Optimal Policy; Financial Crises; Collateral Constraint (search for similar items in EconPapers)
JEL-codes: D62 E32 E44 F32 F41 (search for similar items in EconPapers)
Date: 2026, Revised 2026
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc24:302415

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