Fundamentals News, Global Liquidity and Macroprudential Policy
35 Pages Posted: 19 Nov 2016
Date Written: December 5, 2015
We study optimal macroprudential policy in a model in which unconventional shocks, in the form of news about future fundamentals and regime changes in world interest rates,interact with collateral constraints in driving the dynamics of financial crises. These shocks strengthen incentives to borrow in good times (i.e. when "good news" about future fundamentals coincide with a low-world-interest-rate regime), thereby increasing vulnerability to crises and enlarging the pecuniary externality due to the collateral constraints. Quantitatively, an optimal schedule of macroprudential debt taxes can lower the frequency and magnitude of financial crises, but the policy is complex because it features significant variation across interest-rate regimes and news realizations.
Keywords: Financial crises, macroprudential policy, systemic risk, global liquidity, news shocks
JEL Classification: D62, E32, E44, F32, F41
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