Optimal Policy for Macro-Financial Stability

35 Pages Posted: 11 Aug 2019

See all articles by Gianluca Benigno

Gianluca Benigno

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; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Eric R. Young

University of Virginia

Multiple version iconThere are 6 versions of this paper

Date Written: August 7, 2019

Abstract

There is a recent and now large literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. The normative analysis of these models builds upon the concept of constrained efficient allocation in which the social planner faces the same borrowing constraint as individual agents. In this paper, we show that the set of policy tools that implement the constrained efficient allocation can be used by a Ramsey planner to achieve higher welfare and replicate the unconstrained allocation. Thus the constrained social planner approach may lead to an inaccurate characterization of welfare-maximizing policies relative to the Ramsey approach for the same policy tool. We illustrate this point in a well-known model environment and show that the drawback of the social planner approach arises because of the policy instrument's ability to affect the collateral value in the borrowing constraint.

Keywords: Constrained efficiency, Financial crises, Macroprudential policies and capital controls, Pecuniary externalities, Ramsey optimal policy, Social planner

JEL Classification: E61, F38, F44, H23

Suggested Citation

Benigno, Gianluca and Chen, Huigang and Otrok, Christopher and Rebucci, Alessandro and Young, Eric R., Optimal Policy for Macro-Financial Stability (August 7, 2019). Available at SSRN: https://ssrn.com/abstract=3433523 or http://dx.doi.org/10.2139/ssrn.3433523

Gianluca Benigno

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

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
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Alessandro Rebucci (Contact Author)

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Eric R. Young

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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