Quest for Robust Optimal Macroprudential Policy

50 Pages Posted: 1 Jul 2019 Last revised: 17 Jul 2019

See all articles by Pablo Aguilar

Pablo Aguilar

Banco de España

Samuel Hurtado

Banco de España

Stephan Fahr

European Central Bank

Eddie Gerba

Banco de España; London School of Economics & Political Science (LSE); CES Ifo Institute; European Central Bank

Date Written: July 1, 2019

Abstract

This paper contributes by providing a new approach to study optimal macroprudential policies based on economy wide welfare. Following Gerba (2017), we pin down a welfare function based on a first-and second order approximation of the aggregate utility in the economy and use it to determine the merits of different macroprudential rules for Euro Area. With the aim to test this framework, we apply it to the model of Clerc et al. (2015). We find that the optimal level of capital is 15.6 percent, or 2.4 percentage points higher tan the 2001-2015 value. Optimal capital reduces significantly the volatility of the economy while increasing somewhat the total level of welfare in steady state, even with a time-invariant instrument. Expressed differently, bank default rates would have been 3.5 percentage points lower while credit and GDP 5% and 0.8% higher had optimal capital level been in place during the 2011-2013 crisis. Further, using a model-consistent loss function, we find that the optimal Countercyclical Capital Buffer (CCyB) rule depends on whether observed or optimal capital levels are already in place. Conditional on optimal capital level, optimal CCyB rule should respond to movements in total credit and mortgage lending spreads. Gains in welfare from optimal combination of instruments is higher than the sum of their individual effects due to synergies and positive mutual spillovers.

Keywords: optimal policy, global welfare analysis, financial stability, financial DSGE model, macroprudential policy

JEL Classification: G21, G28, G17, E58, E61

Suggested Citation

Aguilar, Pablo and Hurtado, Samuel and Fahr, Stephan Alexander and Gerba, Eddie, Quest for Robust Optimal Macroprudential Policy (July 1, 2019). Banco de Espana Working Paper No. 1916 (2019). Available at SSRN: https://ssrn.com/abstract=3412759 or http://dx.doi.org/10.2139/ssrn.3412759

Pablo Aguilar (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Samuel Hurtado

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

HOME PAGE: http://www.bde.es

Stephan Alexander Fahr

European Central Bank ( email )

Kaiserstr. 29
Frankfurt am Main, DE 60066
Germany

Eddie Gerba

Banco de España ( email )

Alcala 50
Madrid 28014
Spain
(+34)917088132 (Phone)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

CES Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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