Optimal Policy for Macro-Financial Stability

27 Pages Posted: 30 Oct 2019 Last revised: 16 Feb 2023

See all articles by Gianluca Benigno

Gianluca Benigno

Federal Reserve Bank of New York; London School of Economics & Political Science (LSE) - Department of Economics

Huigang Chen

MarketShare Partners

Chris Otrok

University of Missouri; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Alessandro Rebucci

Johns Hopkins University - Carey Business School; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Eric R. Young

University of Virginia

Multiple version iconThere are 6 versions of this paper

Date Written: October 2019

Abstract

There is a new and now extensive literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. These normative analyses often build upon the concept of constrained efficient allocation, where the social planner is constrained by the same borrowing limit that agents face. In this paper, we show that the same set of policy tools that implement the constrained efficient allocation can be used optimally by a Ramsey planner to replicate the unconstrained allocation, thus achieving higher welfare. We establish this in the context of a well-known model economy, but the result is relevant whenever the policy instrument that is assigned to the planner can affect the market price that determines the value of collateral in the borrowing constraint. The result implies that a robust normative analysis in this model class requires explicit computations of the Ramsey optimal policy problem.

Suggested Citation

Benigno, Gianluca and Benigno, Gianluca and Chen, Huigang and Otrok, Christopher and Rebucci, Alessandro and Young, Eric R., Optimal Policy for Macro-Financial Stability (October 2019). NBER Working Paper No. w26397, Available at SSRN: https://ssrn.com/abstract=3476477

Gianluca Benigno (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

London School of Economics & Political Science (LSE) - Department of Economics

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7807 (Phone)

Huigang Chen

MarketShare Partners ( email )

11150 Santa Monica Boulevard
Los Angeles, CA 90025
United States

Christopher Otrok

University of Missouri ( email )

118 Professional Building
Columbia, MO 65211
United States

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Alessandro Rebucci

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://carey.jhu.edu/faculty-research/faculty-directory/alessandro-rebucci-phd

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Eric R. Young

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
9
Abstract Views
464
PlumX Metrics