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Optimal Macroprudential Policy: Frictions, Redistribution, and Politics

Author

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  • andrea prestipino

    (Federal Reserve Board)

  • Ricardo Nunes

    (Federal Reserve Board)

  • Matteo Iacoviello

    (Federal Reserve Board)

Abstract
We study optimal macroprudential policies in an heterogeneous agent economy with collateral constraints. An enforcement problem results in a collateral constraint that depends on the market value of the borrower's assets. First, we analyze the optimal allocation chosen by a Pareto Planner that cannot solve the enforcement problem faced by the markets and can only affect borrower's policies while taking the supply of credit as given. Second, we study the problem of a Ramsey Planner that can choose taxes that affect both the demand and supply of credit. While the standard macroprudential motive would make it optimal for the Planner to reduce total borrowing, the competitive equilibrium of our model can also feature under-borrowing when the borrower's initial wealth is low enough. Since the model explicitly considers both borrowers and savers, the choice of the loan-to-value ratio and the taxes on assets and borrowing induce distributional effects. We find that the presence of over-borrowing critically depends on only taking into account the welfare of borrowers while disregarding that of savers.

Suggested Citation

  • andrea prestipino & Ricardo Nunes & Matteo Iacoviello, 2016. "Optimal Macroprudential Policy: Frictions, Redistribution, and Politics," 2016 Meeting Papers 1602, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:1602
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    Cited by:

    1. Cristian Badarinza, 2019. "Mortgage Debt and Social Externalities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 43-60, October.
    2. Pierre-Richard Agénor & Leonardo Gambacorta & Enisse Kharroubi & Enisse Kharroubi, 2018. "The effects of prudential regulation, financial development and financial openness on economic growth," BIS Working Papers 752, Bank for International Settlements.

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