Macroprudential Policy, Incomplete Information and Inequality: The Case of Low-Income and Developing Countries

37 Pages Posted: 12 May 2017

See all articles by D. Filiz Unsal

D. Filiz Unsal

International Monetary Fund (IMF) - Research Department; Organization for Economic Co-Operation and Development (OECD)

Margarita Rubio

University of Nottingham

Date Written: March 2017

Abstract

In this paper, we use a DSGE model to study the passive and time-varying implementation of macroprudential policy when policymakers have noisy and lagged data, as commonly observed in low income and developing countries (LIDCs). 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 policymaker 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. The results therefore point to the need for a more careful consideration toward the passive policy, which is usually advocated for LIDCs.

Keywords: Credit, Low-income developing countries, Macroprudential Policy, incomplete information, collateral requirements, inequality, Financial Markets and the Macroeconomy, Government Policy and Regulation

JEL Classification: E44, E32, G18

Suggested Citation

Unsal, D. Filiz and Rubio, Margarita, Macroprudential Policy, Incomplete Information and Inequality: The Case of Low-Income and Developing Countries (March 2017). IMF Working Paper No. 17/59, Available at SSRN: https://ssrn.com/abstract=2967418

D. Filiz Unsal

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Margarita Rubio (Contact Author)

University of Nottingham ( email )

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