Macroprudential policy under incomplete information

Rubio, Margarita; Unsal, D. Filiz

Abstract

In this paper, we use a DSGE model to study the passive and time-varying implementation of macroprudential policy when policy-makers have noisy and lagged data. 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. In this set-up, we compare policy performances of permanently increasing the collateral requirement (passive policy) versus a time-varying (active) policy which responds to credit developments. Results show that with perfect and timely information, an active approach is welfare superior, since it is more effective in providing financial stability with no long-run output cost. If the policy-maker is not able to observe the economic conditions perfectly or observe with a lag, a cautious (less aggressive) policy or even a passive approach may be preferred. However, the latter comes at the expense of increasing inequality and a long-run output cost, which could outweigh their macroeconomic and financial stability benefits.

Citation

Rubio, M., & Unsal, D. F. (2019). Macroprudential policy under incomplete information. European Journal of Finance, https://doi.org/10.1080/1351847X.2019.1679209

• Journal Article Type: Article
• Acceptance Date: Oct 8, 2019
• Online Publication Date: Nov 6, 2019
• Publication Date: Nov 6, 2019
• Deposit Date: Dec 26, 2019
• Publicly Available Date: May 7, 2021
• Journal: European Journal of Finance
• Print ISSN: 1351-847X
• Electronic ISSN: 1466-4364
• Publisher: Routledge
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1080/1351847X.2019.1679209
• Keywords: Macroprudential policy, incomplete information, collateral requirements, credit, inequality
• Public URL: https://nottingham-repository.worktribe.com/output/2781987
• Publisher URL: https://www.tandfonline.com/doi/full/10.1080/1351847X.2019.1679209
• Additional Information: This is an Accepted Manuscript of an article published by Taylor & Francis in The European Journal of Finance on 06/11/2019, available online: http://www.tandfonline.com/10.1080/1351847X.2019.1679209